E31: How you know when it is time to Retire, interest rates and potential recession?
Executive Summary
In this Episode of Financial Discretion Advised, host Tyler Hafford CPF® brings in Jim Bradley CFP® to talk about when someone might know it is time to retire. They dive into some personal experiences and what they commonly see with their clients. Additionally, the two dive into the murky waters of the interest rate environment and if we might tip into recession.
DISCLAIMER: The foregoing content reflects the opinions of Penobscot Financial Advisors and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security.
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Full Transcript
Tyler Hafford:
Welcome to Financial Discretion Advised. I’m Tyler Hafford bringing back onto the podcast this episode is Jim Bradley, the founder here at Penobscot Financial Advisors and the Chief Investment Officer. And Jim, how we doing today?
Jim Bradley:
Tyler, we’re doing really well. I’ve got a heater in my office and staying warm. It’s a cold day up here in Bangor. I think you’re down in Portland today, right?
Tyler Hafford:
I am down in Portland. I was hoping that in your recent trip to Florida, you’d drag some of that warm weather up here with you, but you came back to subzero temperatures.
Jim Bradley:
When I came back and saw that it was 37 degrees and realized that that was 50 degrees warmer than it had been 24 hours before, I gave myself credit for actually dragging some warm weather up. You’re welcome.
Tyler Hafford:
Well, yeah, thank you. Thank you. Find some more of it, please. Awesome. Well, I’m bringing Jim on today to talk about a topic that I think we hear a lot as financial planners, but I don’t know how much we’ve covered it in other content we’ve created. And it’s this idea of when do I know it’s time for me to retire? And Jim had done a blog on that, and I want to pick his brain. Jim’s been doing this for a long time, and I’m really interested to get his perspective on this. Before we dive into that, though, Jim, I do have a series of questions-
Jim Bradley:
Sure.
Tyler Hafford:
… that I’m going to ask you to help the audience get to know you just a little bit better. I’ve asked some to Sam, I’ve asked some to Libby. There are right answers to these questions, and I’ll let you know if you get them wrong. But the first one is, would you rather ski or sit on the beach?
Jim Bradley:
I’d rather ski.
Tyler Hafford:
Okay. So, we’re getting active. Would you rather have a really good slice of pizza or dessert?
Jim Bradley:
I’d rather have a really good slice of pizza.
Tyler Hafford:
Wow. All right. Right answer. You’re on a roll. If you could master one skill that you don’t have right now-
Jim Bradley:
Ooh.
Tyler Hafford:
… what would it be?
Jim Bradley:
Now, there’s a toughy. Holy cow. Oh, boy. Fluent in Spanish.
Tyler Hafford:
Okay.
Jim Bradley:
I mean, I’m working on it.
Tyler Hafford:
How’s that going? Are we at hola?
Jim Bradley:
I can understand everything if you speak very, very slowly. But the problem is nobody speaks very, very slowly.
Tyler Hafford:
And I can understand them if they speak in English, so that’s nice. All right, two more. You could pick one superpower, what would it be?
Jim Bradley:
My superpower would be, it would be flying. I mean, not having to spend all the money on aviation gas.
Tyler Hafford:
For everyone who doesn’t know, Jim is a pilot. I have flown with him, so he is a good pilot, especially when he doesn’t want to throw tricks at us. All right. So, we’re going to fly. Perfect. All right. And the last question that I’ve asked this to Sam and Libby. They both had the same answer. I’m interested to hear what yours is. You have $1,000 to your name. You’re not a good financial planner, so you can’t shove it in the bank. You have to purchase either a stock or a bond. Not an individual stock or an individual bond, just the asset class you have to buy a stock or a bond. What are you buying?
Jim Bradley:
I’m buying a stock.
Tyler Hafford:
Yeah.
Jim Bradley:
Every day, all day.
Tyler Hafford:
I like it. And that was their answer, too. Awesome. All right. Well let’s dive into this topic. Jim, you wrote a blog, and in that blog you started off with using your dad as a good example for someone who’s getting ready to retire or thinking about when is the time for me to retire. And I thought maybe you could just walk us through that a little bit, maybe his experience or what you learned as he was going through that.
Jim Bradley:
Yeah, absolutely. I was writing a blog on the topic that we’re talking about today, how to know when you’re ready to retire. And it got me doing a little bit of introspection at the time. It was a couple of years ago, but I’m a couple of years older, but relatively similar situation. I was approaching the age that my father actually retired. He retired at age 54, and I’m 56 now. And so, when we look at clients and what they choose to do as far as retirement decisions, and when we look at the industry overall, when you think of retirement age, what’s the number that comes most readily to mind?
Tyler Hafford:
Everyone’s telling you 65, right?
Jim Bradley:
- That’s the number. The software that we use, if you don’t touch anything, it defaults to 65. When you talk to people, if they say that they want to retire early, it’s usually because they want to retire before 65. If they say they want to retire late, it’s after 65. I think it all goes back to a time in the past when Social Security benefits reached their full amount at 65. Well, that’s not the case for anybody going into retirement now.
Tyler Hafford:
Right. Right.
Jim Bradley:
It could be because a lot of pension plans were based on a full benefit at age 65, and most often, that’s not even the case now anymore. Those old-fashioned pension plans hardly exist anymore. And when they do, a lot of times it’s age 60 or 62 that you have full benefits. So, yeah, 65 started to seem to me to be just an arbitrary number. And when I looked at my folks, and I looked close in at my family with my father retiring at 54, and my mother who, at the time, was still working, and I can tell you that she worked up until about three weeks ago.
She’s 81 years old, and only stopped because it was absolutely medically necessary that she do so. There’s a pretty broad range of what works for people. My mother, it would not have worked for her to retire any earlier than she did. She didn’t even want to retire when she did a few weeks ago. It came as a result of being forced into it. So, early retirement, not going to work for somebody like my mom who derives a lot of her personal satisfaction, a lot of her social interactions, a lot of her just ability to fill a day with going and doing a work that she really loved doing.
She was in nursing, and she loved it. My father’s the other side of that coin, my father worked in teaching, did so for a good number of years, seemed to like the teaching and the students part, really didn’t like the administration part all that very much. And at 54 years of age, he was clinically depressed, he was in a situation where he had actually built up a lot of credits in the teacher’s retirement system as a result of having a couple of master’s degrees and some military time, and was able to work that in with a little bit of disability time at the end, and has never looked back. He did not want to be in a working environment. He went on to take care of his in-laws a lot and all of my sister’s children. So, he is been a full-time caregiver ever since then.
But I really think that retiring at age 54 saved my father’s life. It was a matter of not just preference, it was a matter of necessity. And he’s a happier man because of it. So, yeah, when we talk about retirement, the first thing that I would throw out there is to not really think in such arbitrary terms. Think about what do you do? What would you do if you didn’t work? And this is the thing that I like to get all of my clients to do before they go into retirement is to actually just tell me, you’re going to be working this Friday and not working on Monday. What are you going to do when you get up Monday morning?
And by the way, they can’t tell me what they’re going to do that Monday morning. I usually tell them they have to cancel their retirement. And nobody, actually, really does. But we try to make sure that we work on that way further out in advance. So, yeah, I encourage people to think about what they want their life to look like, how long they feel they need to or want to work, and we start to work around that. And then, we’ll talk a little bit more, I think, about how we get into the finances of making that happen.
Tyler Hafford:
Yeah. I think there was a couple of things that really struck me from the blog. One, the age in which your father was able to retire because that is substantially earlier than a lot of folks start to consider, which was fantastic for him. And, two, every time, as a financial planner, someone comes in, it always starts with how much do I need to retire? Or what do the finances look like? Or can I retire now? But no one really starts with the mental aspect of retirement and what that means. And really, there’s a few things I think going on. You’re shedding who you are, right? As Americans, what’s the first thing you ask someone when you meet them? What do you do? It’s your identity, and you’re giving that up. And does that make sense? It sounds like it very much made sense in the way of your father, but for your mother it seemed to be a big part of her identity and something that was very important to her.
And then, the other thing that, and you were just alluding to it here, was that transition into retirement. A lot of times when I’m sitting down with clients who are newly retired, that transition of those first few years is really tough for them, especially for someone in just really high demanding jobs or someone who’s just married to the work throughout their working career. That’s a big transition that I don’t think is explored enough, or at least enough thoughts gone into it, about what that’s going to look like. And it sounds like you’re seeing similar things.
Jim Bradley:
Yeah. You could probably echo back to me the idea that most people, eventually in retirement, if there’s one thing that I hear more often than not, it’s, “I have no idea how I ever found the time to work.” People get really busy with all kinds of other things in retirement. But, yeah, that transition, even if it’s well-prepared, is a major life transition, is a major life stressor, right up there with other types of loss. There’s almost a grieving process that people go through, whether they’re leaving an employer that they’ve been at for a while, or especially if they’ve owned a business and they end up be working an orderly transition out. Maybe they sell the business or something like that. But in a lot of cases, it’s important to know and to be aware of and to be prepared for the idea that this is a grief process you’re going to go through. It might be a grief process that lasts 30 days or 30 seconds, but you’re going to have a little bit of a twinge when you make that big of a life change.
Tyler Hafford:
And it makes sense. You’ve dedicated how many years to your working life? You have pride in what you’re doing. It’s difficult to step away from that. So, I’m glad that you address that in the blog. And then, the next thing within the blog that I thought was a good thing to talk about was, on the flip side of folks wanting to get out earlier, there’s the folks that, one, feel like they need to stick around for longer. They need to get those extra years in. They need to get that full retirement age that Social Security’s telling them. But a lot of times, that’s not necessarily the case, especially if they’ve been good savers and investors all the way through their working life.
Jim Bradley:
Right. And I think, actually, when I talk about my parents, I think they’re the exception to the rule. I think most people fall into this in between where they work for a while. They know that if they work longer, they’re probably going to be financially better off. But if they work a shorter amount of time, they might live longer because they’re going to be emotionally and physically better off. And they fall into a pretty tough place of trying to figure out, “Should I work another year? Is it going to be something I need to do? Can I afford to retire right now?” Obviously, this is why people like you and I have jobs. This is when a lot of people who may not have ever used a financial advisor in the past, actually, raise their hands and come to us and say, “Hey, I’m starting to think that it’s about time. I’m getting ready to wrap it up. Can I afford to do so?”
So, they come to us. And if you read all of my blogs, you’ll see that there are some out there for the mechanics of how we do these things. And one of the primary tools that we use is something called Monte Carlo simulation. And that just takes into account the fact that, yeah, I can tell you exactly whether you can retire if you tell me exactly what you’re going to get for a rate of return, if you tell me how much you’re going to spend, how long you’re going to live to the day, and everything. Then, it’s simple math at that point. But reality is life doesn’t work that way, and we don’t know. There’s going to be good years and bad years. You might live a long time or a short time.
So, having all that uncertainty in place, how do we actually deal with that? And we deal with that by modeling that uncertainty and more than just saying, “Okay, let’s run through the rest of your life once,” we run through the rest of people’s life a thousand times and try to put in into place what percentage probability do they have of being able to set things in motion and just letting them go through the rest of their lives and being able to make it through. Once they’re above a certain percentage, and usually for most people, that’s about 75 to 90% probability that we’re looking for, if that percentage of the time we’re forecasting that you’re going to make it through, you’re good to go. You can make that decision to go. So, then, the next thing that I find we deal with, in a lot of cases, somebody will be, hypothetically, they’re 66 years old. They’re starting to feel a little bit weary of doing what they’re doing.
We’ve come to the place where we’ve told them, “Yeah, it’s fine. You can retire.” And at that time, a lot of times, the question is, “I can retire, but should I retire?” And they start to think through whether or not it’s going to make sense to them, both from a standpoint of their quality of life, their satisfaction with how they’re spending their time, and their ability to live the way that they want to live. In those cases, what I find I do, a lot of the times, is I’ll sit with that person and I’ll say, “You can retire now, and we can be 85% sure of your being able to make it by spending this much per month.”
Tyler Hafford:
Right.
Jim Bradley:
“Now, if you work another year, you might be able to have that same percentage probability of success, but you can spend this much more. You can spend a little bit more per month.” And we put a number to it, and I’ve found that that’s helped a lot of people to make the decision in one way or another. They sit there and they say, “Okay, hypothetically, if I work another year, I can spend another a hundred dollars a month in retirement.”
Tyler Hafford:
Yep.
Jim Bradley:
“Is that worth it to me? Is that year of my life of working worth the ability to spend a hundred dollars more that I might not even really need to spend in retirement?” For some people, they go to it and say, “A hundred dollars more. Yeah, it’s not bothering me too much. I’ll go another year.” And that’s fine. But for a lot of people, they look at that, “Ooh, this year’s only buying me that much as an increase to what I can spend in retirement?” That helps them make the decision to cut it off.
Tyler Hafford:
Yeah. We spend so much time talking about value in dollars and cents, but there’s value in earned time, right? You get an extra year of retirement, is it worth that extra a hundred dollars a month? I think it’s a great exercise to go through with people. And to go back to the Monte Carlo, just for some folks to get this. A lot of folks will come in and always ask me the question, “How much do I need to retire?” And I always say, “That depends.” Right? Everyone’s got a different number, and it depends on lifestyle, it depends on a ton of other things going on, and we can run it through these simulations and get to the end. But to your point, when we run those Monte Carlo simulations, at the end, it will show you what it expects you’ll have when you pass away.
So, it’ll show you average return, then it’ll show you bad timing. So, if you have bad returns throughout retirement, what that would look like. And you have this number, and I always sit with folks and say, “Are you trying to leave a large legacy behind? And if you’re not, this number at the end, is that too high? And if we’re working extra years, all we’re doing is adding to that pile of money. We’re not going to be able to enjoy it. It’s just going to be part of this legacy.” Unless lifestyle really increases throughout retirement, if that’s not the goal.
And I think, a lot of times, that can be a good indication to folks to say, “Am I just working so I can have a big number when I pass away? Or am I working because I need it?” So, really interesting. And then, obviously, one of the big things that we run into, and I’ll let you talk to, Jim, but it is just the insurance piece, right? A lot of folks who are trying to get out a little bit earlier than 65 hit this roadblock, and we’re finding it’s difficult. It’s expensive to start picking up insurance.
Jim Bradley:
Yeah. That’s absolutely the case mean. And that’s why the person who’s 66 and maybe looking at working another year to 67 may be improving their spending capability a little bit. Whereas somebody who’s 64 and maybe thinking of putting off to 65 might have a really substantial increase when they get into retirement just because of the way we do insurance in this country. We do provide in semi affordable insurance for everybody when they turn age 65. And that’s not the case until you turn age 65. It’s a lot more expensive, even though we’ve had finally a little bit more of a stop gap in the Affordable Care Act. It’s word affordable that makes me chuckle a little bit of the time when I see the actual premiums that end up coming out of these calculations. And it’s not just health insurance, it’s insurance against long-term care needs, that custodial care down the road. You mentioned that pile of money at the end.
Well, I want to see a pile of money at the end if we don’t have coverage for some of these important things. We can work a little bit closer to the bone and a little bit more efficiently if every major risk that we see out there is covered. So, it’s when we look at paying for insurance, I see people going into retirement with huge amounts of life insurance that they’re paying for, and I say, “You might not really need that going into retirement. That’s not essentially why it’s there.” But at the same time, same person might not have, again, something as basic as long-term care coverage, which is a much bigger risk in retirement. And we can certainly be a whole lot more certain of their ability to make it through without a glitch if they’ve got some of those questions answered before they go into it.
Tyler Hafford:
Absolutely. And I’ll close out this discussion before we get into just what’s going on with the economy here to finish. But two things I would ask you. One, for everyone listening, at what age, and this is a little outside of our conversation, what age do you think it makes a ton of sense to start talking to a professional. I want to start getting my ducks in a row for retirement. What age should I start do that? And two, what do you think people should be taking stock of as they’re making this decision to get into retirement? What’s going on with them to say, “All right, these are signs that I’m getting closer.”
Jim Bradley:
Yeah. Boy, I mean, the real default response there should be start as early as you possibly can. I’m looking back on doing this over the course of 25 years, so there are people who are maybe retiring today that I was working with when they were turning 40. And to a person, everything that we planned for from age 40 has not only come to pass, but probably they’re a little bit ahead of where they were because we tend to plan a little bit conservatively when we’re doing these things. But nobody I’ve ever spoken to has ever said after going through a planning process, “Gosh, I wish I had put this off a couple of years.” So, a simple way of putting it is the earlier the better. The bald reality is that with our firm being a little bit more, I think, accessible to younger people, we do tend to take on a younger clientele.
I think that people tend to engage financial advisors around age 60 on average. And I’m not going to say that’s too late to do anything. It’s not too late to improve substantially on where you are. And it’s definitely a good time to, if you haven’t done anything, to make sure that you are talking to somebody who can put it all into one analytical suite of tools to be able to figure out where you’re doing well and to call out the potential pitfalls you might have not have taken into account. But certainly, for most people, it’s tends to be a combination of, “Okay, I’m starting to make money. So, that money really is starting to mean something to me, and I’ve got the ability to afford to hire a professional to help me along the lines.” And that tends to happen in the thirties and forties.
Tyler Hafford:
Yep. Yeah, and like you said, our firm does, I think, it is more accessible to just younger folks. So, I think we’d see a little bit of a younger demographic. But to your point, speaking with someone when you’re 45 gives you a pretty good runway to start making changes before you get up to 65, if that ends up being your retirement age. At age 60, you just have less adjustments that you can make to make it all work very well. Well, Jim, that was all extremely helpful. Thanks for bringing your parents into it, whether they know it or not.
Jim Bradley:
I love talking to them, talking about them. And I think they watch the podcast, so hopefully, they’ll be okay with my sharing all their deepest seeds secrets.
Tyler Hafford:
Yeah, yeah. And so, I think my takeaway is that retirement looks different for everyone. Making sure you have your financial ducks in a row is really important, but a personal inventory of where you’re at, I think, is really important, as well, as you step away. But I’m going to shift our conversation to what’s going on in the economy right now and get your take. I’m just interested to hear what you think. So, over the last year, 2022, Fed went through this aggressive historic rate hiking cycle to combat inflation, and we’re getting to a point now. And my first question to you is what do you see for the rate hikes? Do you think we’re at the end of it? Do you think that there’s potential more hikes down the road? Or do you think the Fed’s going to just pause and say, “Hey, what do we do? What kind of effect did we have?”
Jim Bradley:
Sure. I think we’re taping this episode on a day when the Fed Chair is speaking. And so, he very well may contradict exactly what I’m saying right now. But the Fed is talking about, yeah, you’re right. We’ve gone through about the quickest jacking up of Fed funds rates in recent memory, and maybe in history. The Fed Chair has laid out the expectation. They have this thing called a dot plot where they’re plotting interest rates going into the future, and they say they’re pretty clear on their “dot plot” that they’re not done raising rates, that they’re going to continue to raise them a little bit more. We’re at currently a target rate of about four and three quarters percent. I think their target, what they call terminal rate, is maybe about five and a quarter percent. And the Fed Chair has not dismissed the idea of maybe doing another half point cut if he felt it was necessary to do so. Or half point increase if he felt that was necessary to do so.
It’s interesting because the market isn’t saying that. When we look at the way that assets that bet on these rate movements are priced at, the markets are essentially saying this was the last rate hike. And not only is it saying that this was the last rate hike, that it’s pricing in the potential for rate decreases as we go through the year. Why would that happen? It would be most likely because of the fact that we do run into a much lower inflation scenario and, potentially, a recession or a significant slowdown in economic activity. So, parsing those two things out, slower inflation, we’re certainly seeing that. The year-over-year inflation right now is 6.5%, but that’s an arbitrary time period a year over a year. I mean over the past three months, we’ve gone on an annualized base of closer to about three to three and a half percent.
So, inflation’s already slowed down a lot, and it’s already getting close to the Fed target, if you look at it at that level. You don’t need to tie it into anything further than a few months back and see that. And I think that the Fed is seeing that. Also, earnings are slowing down relatively substantially. Most companies have put out the expectations that we’re not going to see the same kind of growth in 2023 as we did in the few years that preceded it. So, there’s a lot of good reason to expect that we might have seen rates go as high as they’ve been. Maybe not completely the end, but I certainly don’t expect them to go that much further up.
And if things do slow down more substantially because the Fed is using an implement when they use Fed funds rates and when they use their balance sheet to use quantitative tightening. And by the way, it’s estimated that the amount of quantitative tightening that they’ve done by not purchasing new bonds and by letting maturing bonds flow off of their balance sheet, that equates to about another 2% increase in interest rates, what they’ve done already. So, they’ve been very, very aggressive, clearly trying to ward off inflation. I would say it’s looking very probable that they’ve succeeded there. So, then the next question is how deep of a recession are we facing as we go into the middle point of this year? And does that make them actually turn the corner and start to become more accommodative by lowering interest rates?
Tyler Hafford:
Really interesting. Before we dive into, I want to get your thoughts on a potential recession. But I want to unpack a couple of things that you had mentioned that I think are really interesting. One, that terminal rate you were talking about on the Fed’s plot line and where they want to get to, that’s really important because, correct me if I’m wrong, we’ve never gotten inflation under control without getting that above where inflation was sitting, right?
Jim Bradley:
Right.
Tyler Hafford:
So, essentially, the plot is to say we think we can get inflation to X, and we have to get a little bit above that to drive it back down. Is that a fair understanding of that?
Jim Bradley:
Sure. There’s a lot of that. When we take a look at, they’ve never gotten rates up this quickly without causing a recession. They’ve never gotten inflation down without getting rates up over 5%. All of those are helpful to look at historically, but I always like to say this is coming on the heels of something that is so unprecedented. This is all still the waves washing out from shutting the economy down, not only domestically, but globally over a period of time during the first parts of the pandemic, and the unprecedented amount of stimulus that was thrown on the economy. So, whereas it’s really helpful to know the history behind these things, I’m going to say I’m going to discount it a little bit this time around.
Tyler Hafford:
Well, and I would add to that, why this is historically different, too, is that we also had a group of assets that were built in a low interest rate, high liquidity environment that ballooned the value of the market, and we changed the game on them.
Jim Bradley:
Right.
Tyler Hafford:
And we saw that in the NASDAQ, and big tech names really took a tumble through last year. It’s because the environment rapidly changed on them. But additionally, this quantitative tightening is, essentially, a grand experiment. We’ve never really gone through this in this, I guess, magnitude before, right? So, you had mentioned it adds almost a 2% hike, but there is a lot of unknown with what impact that’s going to have or is that accurate?
Jim Bradley:
Yeah, I think that’s a fair assessment, Tyler. The whole idea of using the Fed’s balance sheet as a tool to move the economy happened pretty much for the first time in the great financial crisis in 2008 when QE, or quantitative easing, came through. And then, there was QE1, and then there was QE2, and it went on to QE infinity until it wasn’t QE anymore. It started to tighten up just going right up in the years coming up to 2019. And that was a little bit of tightening. This is tightening in a way that we’ve never tried out before. And I think that we’ve hit a brake pedal that doesn’t engage right off the bat, and we’ve hit it pretty hard. So, we’re going to see how much this puts us into a skid throughout the course of this year.
And it’s really hard to say. I mean, there’s equally good arguments, I think, on both sides when it comes to, man, we’ve hit the break so hard, we’re really going to hit a hard recession here on one side of it. And then, on the other side of it, we’ve never been in a situation where corporate balance sheets, consumer balance sheets, the jobs market, everything is looking so good going into a period of tightening. So, like I said before, throw out the playbook, I think, and just hold on for what’s likely to be a bit of a bumpy ride as the market tries to figure out where this thing goes.
Tyler Hafford:
Yeah. Before I get to that million dollar recession question with you, you brought it up, and Chairman Powell mentioned this in his last speech, that this is such a different animal than what we’ve seen historically with inflation. And the response has been historically different than how we’ve approached it in the past. So, as easy as it is to bash the Fed, I am very happy I’m not sitting in their shoes right now. A pretty tough thing to have to navigate. But I’ll ask you, they’ve done this tightening, there’s a potential pause here in the near term, we’re doing all this quantitative tightening. But we do have, like you mentioned, strong labor market, we do see some wage growth out there, things that aren’t really consistent with a really deep, dark recession. One, do you think we see a recession here? And two, are you leaning more in the camp of the 90s style recession or an ’08, ’09 recession? And I won’t hold you to any of these answers because I understand all of this can change pretty rapidly.
Jim Bradley:
Thank goodness. I’m already trying to wriggle my way out of the pizza thing because I wanted to have the dessert after the pizza.
Tyler Hafford:
You got that one right, Jim. You got that one right. Don’t backtrack, now.
Jim Bradley:
When we’re looking at, again, a situation where we’re so strong in so many areas, I think that there’s a reasonably decent assumption to be thrown out there. And I would definitely fall on this side of it to say that if we have a recession, and I think we will. I think there’s a pretty good chance that, let’s say, two out of three shot, that we see something that actually qualifies as a recession. Not just the GDP numbers being negative for two consecutive quarters, but potentially tying that in with earnings going down substantially and potentially with jobless numbers increasing to some degree. All of the things that the National Bureau of Economic Research uses as criteria to actually call something a recession. I don’t see it being as bad as the 2008. I think it’s more in line with your garden style, garden variety recession.
Right now, I’d say that the market is pricing in, pretty fairly, a very mild recession. So, if it got worse, it wouldn’t have to be 2008 bad. If it got just a little bit worse than what’s being priced in, we could see some more downside movement in markets this year. But there’s still that part of the market that’s pricing in some probability that inflation comes down. Like I said, that’s starting to show up, I think, a little bit, surprisingly, to the degree that it’s slowing down. We might get to pretty close to the Fed’s target by the end of this year. And if they can do it with an economy that’s robust enough, with a jobs market that’s robust enough to not get substantially damaged by then, then I’d say that that part of that market that’s moving it in the upward direction a little bit lately might be the part of the market that’s right.
And so, we wouldn’t ever want to have somebody go into this year saying, “Okay, recession. Time to get wickedly conservative with a portfolio.” And we certainly wouldn’t want them to say, “Okay, we got through a bear market last year. Let’s put everything on black and just go for broke with the investments.” It’s still prudent allocation makes a lot of sense, and having a little bit in each camp. Bonds, which should do very well if we have a recession and interest rates go down, equities, and other types of alternative investments that should do, actually, really well in certain sectors if we don’t hit a big old divot.
Tyler Hafford:
Yep. Yep. Well, awesome information. And just to what you were just talking about, for anyone listening, is, typically, when you see that garden variety recession out there, you tend to see a 25 to 30% decline in the market, which is consistent to what we saw last year. If it is going to be deeper, to your point, you see more of a drop of like 45%, which we would argue that the market has some more pain to feel, if that’s going to be the case. Really interested to see what happens over the coming months, and how the Fed navigates this stuff. Hopefully, inflation keeps moving in the right direction. But Jim, I want to thank you for coming on today. Anyone who would like to read Jim’s blog, it’s on our website under PFA Ponderings under our insight tab. Jim’s got a ton of great content out there, so please go in and find a topic you like and read it. He’s fantastic at it. But Jim, thanks for coming on.
Jim Bradley:
Thank you, again, for having me, Tyler, and hope I get invited back again to talk about something else.
Tyler Hafford:
Well, I’m going to think up some more intrusive questions for you. Hope you’re ready.
Jim Bradley:
Perfect.
Tyler Hafford:
Thanks, Jim.
Jim Bradley:
Thank you.
Speaker 3:
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