The beginning of 2022 looked promising. Stocks were up, portfolios looked great, the housing market continued at a record pace, and it looked like we were in position for a really strong year. But within just a few weeks, the market started to get volatile.

The economy slowed significantly, and we experienced the textbook definition of a recession: Two consecutive quarters of negative economic growth. In other words, nationwide, economic activity decreased over the course of six months, and the economy slowed.

What causes a recession?

There’s a lot of debate here, and truthfully, economists don’t exactly know! Some believe it’s based on unemployment numbers and labor market fluctuations. Some attribute it to several quarters in a row of shrinking spending, or worsening sentiment among small businesses and consumers. It could also be related to rising prices and growing living expenses.

It’s impossible to isolate one single factor that causes an economic downturn because these factors (and thousands of others) all work together. A recession is really just one giant domino effect. A single factor triggers another, and another, and so on, until the whole economy slows.

How long do recessions usually last?

The Great Recession of 2008 officially lasted for 18 months, but its effects were felt for much longer. On the other hand, the last recession was recorded in June of 2020 and it only lasted a few months. That brief pandemic-triggered downturn didn’t meet the technical definition of two consecutive shrinking quarters, but because of the magnitude of the decline, the National Bureau of Economic Research labeled it a short recession. We recovered from that drop, and started taking major ground, within months.

While it’s normal to see a recession last anywhere from a couple of quarters to a couple of years, today’s recession is just a little different from our run-of-the-mill downturn…. We’re not just seeing an economic slowdown, we’ve got a hefty dose of inflation, too.

So what does this economic downturn (and rampant inflation) mean for your portfolio— and the market as a whole?

The stock market and overall investment market is always forward-looking. At the first signs of economic weakness, the market will pull back— triggering the first stage of what could become a recession. The market as a whole responds faster than any individual can. That’s why the market itself is a great predictor of what’s to come, even if the data isn’t there yet.

Here’s what that means for your investments, retirement portfolio, and personal finances:

1. The recession has already taken its toll on stocks

Back in November of 2021 we started to see some early signs of a slowdown. Not yet a recession, but a slowdown in overall economic activity. At that time, the stock market was peaking, driving returns that were almost unbelievable for some investments. Inflation was running wild, unchecked, sending prices through the roof. But that level of supercharged economic activity, and skyrocketing prices, wasn’t sustainable, so the market recalibrated and pulled back.

We shifted from having a government-stimulated economy, in response to COVID, to pushing up interest rates at a record-setting pace in hopes of curbing inflation. And that put a brick wall in front of economic growth.

When the market sees red flags— signals that something might change soon— it immediately reprices risk. In other words, the stock market adjusts its expectations based on this new information, and reprices stocks accordingly.

A recession isn’t “officially” named such until we see six consecutive months of shrinking growth. But the market already responded to shrinking growth and rising interest rates months ago. That’s why stocks started tumbling, pricing in the new level of risk, long before the “R” word made headlines, and why the latest data that actually proves we are in a recession has little effect on stocks.

2. This recession can be a golden opportunity to reallocate your portfolio

So the market saw this downturn coming months ago, long before the average investor or saver could prepare for a recession, and dropped accordingly. Now that the official recession is here, how can you make the most of this market and still make progress towards your financial goals?

Stay invested, and talk to your Cook Wealth Advisor about allocating some of your portfolio to these investment opportunities.

Get this— every time the market has dipped like it did in early 2022, within three years, it has bounced back. Is history a perfect predictor of the future? Absolutely not. But the stock market is forward-looking, and you can bet the market expects that we’ll fully recover from this recession. And when we invest during times of contraction, we reap the benefits during times of expansion.

Buying the dip is not a one-size-fits-all strategy. (That’s why we always encourage you to talk to a Cook Wealth Advisor before you make any changes). The best asset allocation for you depends on your financial situation, your retirement timeline, your current investments, and dozens of other factors. But for some investors, this is a great opportunity to rebalance your portfolio, diversify your assets, and invest in stocks that have a strong recovery potential ahead.

You don’t have to fear the next recession— but you should prepare for it

The average retiree will probably see 4-6 recessions during retirement. That’s why it’s so important to prepare for recessions in advance. A little preparation now (and a partner who can guide you through every season) helps you make smart long-term decisions when the market peaks and dips. 

At Cook Wealth, our experienced team of Wealth Advisors and tax experts have seen (and weathered!) it all. We don’t just help our clients survive market downturns, our financial and investment plans have volatility protection built right in.

When we create your custom, tax-optimized investment plan, we’ll ensure your wealth is properly diversified across multiple industries. That protects you from unintended risk, and maximizes your opportunity to benefit from the market recovery. No matter which sector recovers first, or best, your portfolio is poised to benefit.

We can’t predict the future. But we can help you prepare for it.