Is another recession on the horizon?

More than 15 years have passed since the Great Recession. It's been five years since the American economy endured its last recession triggered by the COVID-19 pandemic and its subsequent recovery. How are advisors viewing the probability of another upcoming recession? 

The latest RIA Economic Outlook report conducted by Security Benefit found the majority or RIAs (57%) believe the likelihood of a recession over the next 12 months to be low or none, and 45% see a moderate to high chance of recession.

“It is interesting that such a high percentage of respondents see moderate to high risk of recession,” said Steve Dean, chief investment office of the $4 billion RIA Compound Planning. “That may reflect a couple of divergences we see among households and individuals: consumer spending has remained strong, but mostly driven by higher income households that have benefited most from the rising stock market.”

Security Benefit's index measures RIA sentiment on a scale from zero to 100, and its score fell to 58 in the third quarter from 60 in the previous quarter. Mike Reidy, Security Benefit’s national sales manager for its RIA channel, said the firm’s latest research surveyed 100 RIAs spanning $50 million to upwards of $250 million in AUM. 

“I would say that the larger RIA firms that we polled are slightly more optimistic than the ones that have say between $50 and $150 million,” Reidy told InvestmentNews. “They’re a little bit more optimistic the further you go up the food chain.”

“I will be watching fundamental measures of corporate earnings, especially from tech and AI-related companies,” Dean said. “Consumer spending patterns are always a key component of economic growth. If the wealth effect of higher stock markets have kept spending strong, any prolonged sell-off in the stock market could threaten that spending growth.”

Economists from JPMorgan and Goldman Sachs calculated that for the week ending October 4, claims for state unemployment benefits rose to 250,000, up from 224,000 the prior week. This marks an improvement from when the Bureau of Labor Statistics said that jobless claims reached 263,000 for the week ending September 6, the highest since October 2021.

[There is] moderate risk of recession if softness in labor markets turns to outright weakness,” said Andrew Graham, managing director of California-based RIA Jackson Square Capital. “We keep an eye - once the BLS/government data is released again - on weekly jobless claims with three consecutive weeks over 260,000 as an early recession warning.”

Another RIA viewing the American economy as facing moderate risk of recession is Verdence Capital Advisors, a Maryland-based firm managing over $4 billion in assets. Verdence also expects the inflation rate is more likely to hover around 3% over the next year than move significantly below it. Security Benefit’s survey found seven in ten advisors (69%) expect inflation to remain below 3% over the next year.

“The biggest concern is the consumer as they make up the bulk of GDP. Spending has been resilient, but with credit card debt a burden and inflation continuing to strain budgets, we do not see an upside catalyst for consumer spending. We are also watching the surge in capex spending and if this pace can continue,” said Megan Horneman, CIO of Verdence Capital Advisors.