In case you missed it, the numbers are in and the U.S. GDP shrank in the first quarter of 2022. This is unwelcome news, especially because it resides on the heels of massive inflation, labor shortages, and supply chain issues. This portmanteau of “stagnation” and “inflation” to give us stagflation, aptly captures exactly what’s happening in the economy right now. While one quarter of shrinking GDP growth isn’t enough to usher in a recession, we should be ready for the possibility that it occurs. Getting ahead of this conversation with your clients can be a helpful step toward building a relationship of trust and value in your wealth management advisory service.
The History of Stagflation
The U.S. economy went through a similar problem in the 1970s. An oil embargo led by OPEC caused energy prices to skyrocket (sound familiar?) causing almost everything to become more expensive. This was coupled with a shrinking economy due to energy rationing.
While there are varying theories on why stagflation happened in the first place, it’s now understood that we have a very high probability of repeating this scenario. Trillions of dollars were printed over the last two years and the economy has been hit with a barrage of problems since then, in addition to a fresh war in a critical sector of the world economy.
Will There Be a Recession?
If your clients come to you asking about a recession, it’s important to understand what might be leading to it and what might be keeping it in check. First, you can acknowledge that their fears of a full blown recession are legitimate. There are other indicators, especially in the aggressive growth and valuation in the housing market, that there will be problems down the road in that sector, which ultimately impacts every facet of the economy.
The saving grace is that the U.S. unemployment rate is good, almost as good as the strong economic growth pre-pandemic. This can certainly keep stagflation at bay, at least for now, but it remains to be seen what will happen in the long run.
Supply chain issues have put a major malaise on GDP growth and these are particularly hard to dig out of. Fresh lockdowns in China have exacerbated the issue and Russia disrupting Europe’s gas supply has made things even worse. These will take years to untangle but in the meantime, manufacturers onshoring production will help bolster domestic markets and relieve scarcity issues at the same time.
Keeping Money Safe in the Markets
Regardless of the economic and political situation, your client’s money, even in the face of GDP contraction, should be relatively stable. While the markets are down in the short-term, there’s no reason to believe that they will completely implode, although the explosive growth of the last few years may be coming to an end. Helping your clients remember that a drop means sale pricing and that the markets are efficient over time will go a long way to keeping them on track for the future.
Diligently watch the market, put your clients first, and consider their financial plans for the future. If you’re struggling with the uncertainty too, remember to keep a cool head, look at the big picture and join a community of advisors who have each other’s backs.