Help clients prepare for a pending recession

People don’t like to experience recessions, much less look forward to them. Recessions often arrive unexpectedly, even for investors tuned in to the latest economic news. However, the likelihood of an upcoming recession – whether in the form of a soft landing, hard landing, or a rolling recession – seems an obsession lately among corporate executives and economists. “Are we in a recession?” has been a frequent question in the financial media for much of the past year.

Awareness of a pending recession is growing among the general public as well. For example, a recent Nationwide Financial survey taken in advance of Women’s History Month in March found that women investors are more fearful of a recession this year than they were in 2022. According to the eighth annual Advisor Authority survey, powered by the Nationwide Retirement Institute, over 40% of women believe the U.S. is currently in a financial crisis, with another 24% thinking a crisis is approaching.

As a financial professional, keeping your clients on track toward their goals is a key mandate, especially in times of recession or market upheaval. When a rough economic patch appears on the horizon, your clients seek your guidance to help them check their emotions and stick to a strategy to help them manage market risk.

Even with growing awareness of a possible recession, some investors may not be prepared for the heavy weather. For example, less than half (45%) of women polled in our recent Advisor Authority survey said they have a strategy to protect against market risk. That’s down from 51% of women respondents who answered similarly in 2022.

What guidance can you offer your clients when they ask how to prepare for a recession? Here are four action items to consider sharing with your clients:

• Show clients a “widescreen view” of their financial picture. As you talk with clients, ask their opinion on how a recession may impact their employment or income. It’s also an excellent time to look closely at spending and borrowing habits, seeking opportunities to increase their savings.
• Help clients build an emergency fund customized for their situation. A pool of readily accessible money can be crucial for clients to help them survive financial hardships caused by a recession. A recent Bankrate survey found that nearly 40% of Americans have less personal savings than a year ago. Just around one-quarter increased the savings over the past year. An ample emergency fund can prevent the need to take on debt, borrow from retirement accounts or sell investments during turbulent times.
• Diversify your client’s income sources. Even with diligent financial planning, relying on a single source of income may expose a client to heightened financial risk during an economic downturn. In another finding from our Advisor Authority survey, 87% of women feel vulnerable to unforeseen events even if they can take all the proper steps to manage their finances. This percentage represents a significant increase from the previous year’s figure of 76%. It’s essential for clients who are early in retirement or closing in on retirement to prioritize diversification of their income before they find a primary income source is lost or greatly reduced.
• Align client portfolios with their risk tolerance and time horizon. A suitable asset allocation between stocks and bonds would enable clients to manage market volatility with greater confidence. The current market environment offers a unique window for adjusting clients’ portfolio allocations. For example, short-term Treasury bill yields are, as of this writing, at their highest levels in over a decade; the one-year and six-month Treasury bills yield just over 5.0%. At current yield levels, bonds are attractive alternatives to stocks, but clients should keep their investment time horizon in mind as they consider how to allocate their assets. As the chart above illustrates, bonds may provide better total return opportunities in the short term, but over a longer-than-10-year time frame, stocks have been shown to offer better relative returns. Clients a decade or more away from retirement would benefit from time spent in the market, instead of moving in and out of investments and attempting to time the economic cycle. But as clients get closer to retirement, bonds can act as a stabilizer in a portfolio against the variability of stock returns.

It’s reasonable to expect a recession to begin at some point this year, although how severe this recession could be is mainly uncertain. As a financial professional, you can help your clients prepare for the likelihood that inflation and market volatility will persist in the year ahead. Still, the good news is that we don’t expect to see extreme impacts on the economy and investors as we’ve experienced in recessions of the recent past.