Recession threat takes center stage

Financial advisers scramble to keep clients on track as markets drive lower, inflation climbs and an economic slowdown seems unavoidable.

As the tumblers continue to line up for an economic recession, which might already be underway, financial advisers are earning their fees through a blend of psychology, market analysis and fortune telling.

“We are telling our clients to hope for the best and plan for the worst,” said Jon Ulin of Ulin & Co. Wealth Management.

“Perhaps nothing summarizes the investor experience better than the old quote, ‘Nothing worth doing is easy,’” Ulin said. “The current market environment, as uncomfortable as it may be, serves as a reminder that staying invested is difficult.”

With the broad equity markets already in or trending toward bear market territory, the Federal Reserve trying to curtail runaway inflation with higher interest rates, and the Biden administration threatening to raise taxes, most market watchers are saying investors should brace for a rough landing.

“We don’t think it’s a threat of a recession because we think that ship has come and gone a while ago, and we now think inflation will be here until 2024,” said Ed Cofrancesco, chief executive at International Assets Advisory.

An economic recession, which is defined as two consecutive quarters of negative economic growth, is typically identified once an economy is deep in it or past it. While recessions are a normal part of economic cycles, the slowdown is seen as an obvious outcome of the Fed’s efforts to tamp down inflation that’s running at a 40-year high.

The last time inflation was at this level in the early 1980s, the Fed chair at the time, Paul Volcker, undertook an aggressive push to drive interest rates up to 20%.

Against that backdrop, Cofrancesco mocks current Fed Chair Jerome Powell for a target rate hike of between 75 basis points and 100 basis points.

“The politicians have to be willing to raise interest rates, and 75 basis points is pissing in the ocean,” he said. “You have to reduce spending, and you can’t raise taxes in this environment.”

Jennifer Grant, an adviser at Perryman Financial Advisory, said that the current economic malaise isn’t lost on clients, and that she’s doing her best to keep them focused on the plans that are in place.

“We are not necessarily prepping our clients for recession as much as we are reminding them of why we have a plan and encouraged them to have an emergency fund in place,” Grant said. “Yesterday a client asked if we had an emergency plan and we said, ‘No, we have an all-weather plan.’”

While positive sentiments and calming reminders might help prevent clients from over-stressing about their portfolios, some swift action might also be in order.

“There is a lot of concern that a soft landing just isn’t going to be possible, but from the investors’ perspective, it’s more about what’s happening in the markets,” said Dana D’Auria, co-chief investment officer at Envestnet.

D’Auria believes advisers can help clients by employing “hyper personalization” strategies, including direct indexing and tax mitigation.

“A lot of this is about keeping clients in their seats through this, because the worst possible outcome is selling low,” she said.

While financial advisers are famous for helping clients stick to a plan, that doesn’t necessarily mean just standing in place to take the brunt of an oncoming storm.

“We have been prepping for a future recession by increasing our exposure to custom market-linked notes within our clients’ portfolios,” said Thomas Balcom, founder of 1650 Wealth Management. “In addition, we have been increasing our use of private real estate as both an inflation hedge, portfolio diversifier and recession play.”

Max Wasserman, founder and senior portfolio manager at Miramar Capital, said that with markets down double digits, it’s not too late to “de-risk portfolios.”

“Markets are down, but they can still go lower,” he said. “It’s a good time to de-risk out of leveraged investments and speculative stocks, and increase dividend exposure.”

For clients in or near retirement, Wasserman advised ensuring they have enough short-term liquidity to weather the coming months of market and economic downturns.

On the fixed-income side of the portfolio, he said the trend toward higher interest rates is creating some opportunities for shorter-term bonds.

“One-to-three-year corporate bonds are paying 3% to 4%,” Wasserman said. “But stay short term, where you’re getting 90% of the long-term return in three years.”