• Major banks and economists now say chances of a recession have significantly increased
• A recession is marked by a decline in employment, income, sales, and GDP
• Jobs, investments, and manufacturing are all put at risk during a recession

Recession Much More Likely According to Major Banks

Goldman Sachs says the risk of the US falling into recession within a year has doubled after the Fed’s aggressive rate hike. They think that the risk has jumped to 30% from 15%. When considering the likelihood of recession over the next two years, that risk jumps to almost 50%.¹

The Fed just raised rates 75-basis-points. The increase was the biggest rate hike in borrowing costs since 1994. The Federal Reserve is responding to inflation hitting a 41-year high of 8.6% in May.²

The stock market is reacting negatively to the rate hikes. Stocks are falling and bond yields are rising. They are now seen as a drag on economic growth.

Nomura, a leading Japanese investment bank, also predicted a recession. It said the slowdown would be shallow but lengthy. That’s because the Fed and government are highly unlikely to step in with any stimulus.

Morgan Stanley sees the chance of recession at 35% over the next year, up from 20% previously. Morgan Stanley said US stocks could crash another 20% as recession risks increase. Meaning the S&P 500 would drop to 3,000. The index has already dropped 20% from its recent high in early January.³

What is a Recession?

The general definition of a recession is two straight quarters of declines in real gross domestic product. The official declaration that we are in a recession comes from the National Bureau of Economic Research, a private organization of economists. NBER usually declares a recession from 6 to 18 months after the recession’s start. They declare a recession based on certain indicators. The indicators include – lower employment, a drop in personal income, a drop in manufacturing, lower retail sales, and a drop in monthly GDP.

What to Expect During a Recession

Recessions are painful. People lose jobs, can’t pay bills and some lose their homes. There is less money for luxuries. People forego vacations or nights out. There is also less money for essentials like food and medical care.

Jobs: During a recession, jobs disappear. Unemployment levels rise. It becomes harder to find a job since more people are out of work. The biggest losses are in manufacturing and related industries. Sectors that rely on discretionary spending, like leisure, hospitality, and retail, will all lose jobs. Financial industries will shrink as well because businesses and individuals borrow less. Those who keep their jobs can expect to not get a raise or bonus. Hours and wages may be reduced. Even worse, if you can’t pay your bills due to job loss, you may face the prospect of losing your home and other property.

Stock: Stocks generally tank during a recession. The stock market begins to fall from its peak months before the actual recession starts. Investors usually move from riskier securities and into safer investments like precious metals. Retirement plans get upset as the value of stock portfolios drop.

Savings: People who still have jobs tend to spend less and save more. But this can create the “paradox of thrift.” One person’s spending is another person’s income. So, if too many people spend less, the result is a negative spiral. Incomes become progressively lower, and unemployment gets higher.⁴

Manufacturing and Services: These areas decline during a recession. As costs rise and demand drops, industries cut back production and services.

Liquidity: Banks are less likely to lend in recessions. They fear they are not going to get repaid.

Deficits: Deficits usually increase. Governments often increase spending to offset the recession’s effects. At the same time, tax receipts falls as corporate and personal incomes decline.

The only upside is that recessions don’t last forever. The NBER tracks the average length of U.S. recessions. According to NBER data, from 1945 to 2009, the average recession lasted 11 months. This is an improvement over earlier eras: From 1854 to 1919, the average recession lasted 21.6 months. Knowing that a recession is likely gives you the opportunity to prepare for it. Contact American Hartford Gold to see how a Gold IRA can secure your nest egg during an economic downturn.⁵

Notes:
1. https://markets.businessinsider.com/news/currencies/us-economy-recession-risk-doubles-gdp-fed-inflation-wages-goldman-2022-6
2. https://markets.businessinsider.com/news/currencies/us-economy-recession-risk-doubles-gdp-fed-inflation-wages-goldman-2022-6
3. https://markets.businessinsider.com/news/currencies/us-economy-recession-risk-doubles-gdp-fed-inflation-wages-goldman-2022-6
4. https://www.jhinvestments.com/viewpoints/investing-basics/what-happens-in-a-recession
5. https://www.forbes.com/advisor/investing/what-is-a-recession/

• In reaction to inflation hitting 8.6%, the Federal Reserve raised rates .75 percentage points
• Recession and higher unemployment deemed necessary to bring inflation down
• “Mad Money” Jim Cramer recommends gold to hedge against inflation and recession

Record Breaking Interest Rate Hikes

Record-high inflation is being met by record-high interest rate hikes. After the inflation rate surged to 8.6%, the Federal Reserve raised interest rates by 0.75-percentage points. That is the largest increase since 1994. It had previously indicated that it would raise rates by .50-percentage points as it had done last month. The Fed signaled that it would continue raising rates until inflation is under control. Projections show interest rates hitting at least 3% this year and 3.75% by the end of 2023. This would be the most aggressive rate rise since the 1980s.¹

Regarding the .75 increase, Fed Chairman Jerome Powell said, “I do not expect moves of this size to be common.” However, he immediately followed that statement by saying the Fed could decide between a 50 and 75 basis point increase at its next meeting.²

Analysts believe current rate hikes will lead to a recession. Recession seems to be the only way to break the grip of inflation. Most Federal Reserve officials now project an almost 40% drop in growth from previous projections.

Mr. Powell suggested the chances of a “soft landing” are slim. “What is becoming more clear is that many factors that we don’t control are going to play a very significant role in deciding whether that’s possible or not,” he said. “It is not going to be easy.”³

The effects of interest rates are rippling through the economy. Mortgage lenders are quoting a 30-year fixed rate above 6%. Levels that high haven’t been seen since 2008. Large real estate brokerages are announcing layoffs as home purchases have stalled.

Higher Unemployment Required

Not so long ago, the Federal Reserve was providing stimulus to help the labor market recover from the pandemic. Now, officials are signaling that high unemployment rates may be necessary to stop inflation.

Unemployment is currently near a half-century low of 3.5%. Low unemployment is thought to fuel inflation. In theory, a tighter labor market forces employers to compete for workers by raising wages. Increasing wages raises the cost of production and in turn, prices. They also devalue the dollar. If everyone gets a 20% raise, then prices will rise accordingly. Mr. Powell estimates that the desired “natural” level of unemployment which won’t cause inflation is well above 3.6%.

A Global Problem

Around the globe, central banks are following the Federal Reserve’s lead in raising rates to control inflation. They suggest we are entering a new inflationary era. High inflation will become the rule, not the exception. As a result, people should expect slow housing markets, high unemployment, and depressed stock prices.⁴

Global inflation is being driven by geopolitical concerns. The Fed is in a tight spot. They can’t do anything about the world outside their immediate grasp. They can raise interest rates. They can cause a recession. And high inflation could still become a fact of life for years to come.

Gold Stands Out

Inflation affects every aspect of life. Truthfully, the Fed has limited options and no guarantees of success. That’s why “Mad Money” host Jim Cramer is recommending gold.

“As an investment, gold won’t offer the same returns as stocks, but it can offer some relief from rising inflation, says Jim Cramer. “I believe in gold,” Cramer said. He argues that it is one of three things that “holds its value in a recession.” The other two are fine art and mansions.

Cramer has always recommended owning a bit of gold “as insurance against the unknown,” as he said in 2019. Within his personal portfolio, 5% is typically put aside for gold-related investments.⁵

Buying physical gold is an accessible way to own precious metals. To learn more about how a Gold IRA can protect your assets, contact American Hartford Gold today.

Notes:
1. https://www.wsj.com/articles/fed-raises-rates-by-0-75-percentage-point-largest-increase-since-1994-11655316170?mod=livecoverage_web
2. https://www.wsj.com/articles/fed-raises-rates-by-0-75-percentage-point-largest-increase-since-1994-11655316170?mod=livecoverage_web
3. https://www.wsj.com/articles/fed-raises-rates-by-0-75-percentage-point-largest-increase-since-1994-11655316170?mod=livecoverage_web
4. https://www.wsj.com/livecoverage/federal-reserve-meeting-interest-rates-june-2022/card/haunting-the-fed-meeting-a-possible-shift-to-a-higher-inflation-regime-1TU1aIpfR3Nia69QlOts
5. https://www.cnbc.com/2022/06/15/jim-cramer-why-gold-is-a-winner-in-times-of-inflation.html?__source=iosappshare%7Ccom.apple.UIKit.activity.Mail

• World Bank Global Economic Prospects Report forecasts stagnant growth and high inflation
• The Report details the very real risks of a global debt crisis and stagflation
• Treasury Secretary Yellen admits upcoming stagflation but deflects responsibility for inflation

World Bank Report Forecasts Global Economic Downturn

The World Bank Global Economic Prospects Report released its most recent findings. And the globe’s prospects do not look good. According to the World Bank, the effects of the Ukraine War and the Covid-19 pandemic will likely lead to years of slow growth and high inflation.

The World Bank lowered their global economy growth forecast. It went from 5.7% in 2021 to 2.9% in 2022. This forecast is lower than their original one of 4.1%. They expect a steeper decline to occur in 2023 and 2024. Poorer countries will be hit the hardest. Millions in the developing world will be pushed into extreme poverty.¹

Central banks around the world are quickly raising interest rates. They aim to bring inflation under control. This is the most widespread tightening in two decades. In the past four months, monetary authorities announced more than 60 rate increases. More are expected ahead.

As a result, low- and middle-income countries now face a serious debt crisis. Their debt is at multi-decade highs. “The associated rise in global borrowing costs and exchange-rate depreciations may trigger financial crises, as it did in the early 1980s,” the World Bank said.² 

Recession and Stagflation Predicted

The Report said the combined impact of the pandemic and the war would leave global economic output in the five years from 2020 to 2024 more than 20% lower than the growth between 2010 and 2019. World Bank President Malpass said, “For many countries, recession will be hard to avoid.”³

The World Bank also warned of possible global stagflation. Stagflation is stagnant economic growth combined with high inflation. They likened current conditions to the stagflation of the 1970s. The ’70s recovery required steep interest rate increases. These increases caused financial crises in developing economies. They also sparked a global recession and a string of debt crises.

Stagflation will be a rude awakening for most Americans. It has been 50 years since the country experienced it. The two ingredients for stagflation may already be here. During Q1 2022, the U.S. economy contracted 1.5%. And, in April, the Consumer Price Index inflation measure was 8.3%.

Treasury Secretary Addresses Inflation

Treasury Secretary Janet Yellen has even said that we’re already seeing “stagflationary effects”. The United States faces “unacceptable levels of inflation” she said. Yellen added that it was likely to remain high but that she hoped price increases would soon moderate.⁴

Ms. Yellen is part of a wide-ranging publicity effort. Inflation is the dominant midterm election issue. Democrats are at risk of losing their narrow control of Congress. At a Senate Finance Committee hearing, Yellen rejected the Republican theory on inflation. They said that the record inflation was caused by Democratic President Joe Biden’s $1.9 trillion American Rescue Plan last year.

Yellen repeated her views that inflation is being fueled by supply-demand mismatches. She cited excessive demand for goods over services during the pandemic. She also blamed severe supply chain disruptions. High energy and food prices caused by Russia’s invasion of Ukraine have also pushed inflation higher, she said.

The causes of inflation may be up for debate. However, the effects are not. “The world economy is again in danger,” World Bank President David Malpass said. “It is facing high inflation and slow growth at the same time. Even if a global recession is averted, the pain of stagflation could persist for several years.”⁵

The entire planet is experiencing an economic upheaval. Experts agree that things will get worse before they get better. Protect your assets from this global economic downturn. A Gold IRA is one of the best investment vehicles to provide you with an economic safe haven. Contact AHG to learn more. 800-462-0071

Notes:
1. https://www.ft.com/content/6f379a95-21e0-4d25-ba09-c91b1432c584
2. https://www.bloomberg.com/news/articles/2022-06-07/stagflation-danger-sees-world-bank-cut-global-growth-outlook
3. https://www.bloomberg.com/news/articles/2022-06-07/stagflation-danger-sees-world-bank-cut-global-growth-outlook
4. https://www.fastcompany.com/90759068/what-is-stagflation-world-bank-warning-economy
5. https://www.bloomberg.com/news/articles/2022-06-07/stagflation-danger-sees-world-bank-cut-global-growth-outlook

• JP Morgan Chase CEO predicts an economic hurricane to pummel the economy
• The economy faces unprecedented challenges including record inflation, rising interest rates, and the Ukraine War
• JP Morgan is preparing for that turbulence by becoming more conservative with its balance sheet

Dimon Forecasts Economic ‘Hurricane’

JP Morgan CEO Jamie Dimon warned investors to brace for an economic “hurricane.” The economy is struggling against an unprecedented combination of challenges. Those challenges include tightening monetary policy and Russia’s invasion of Ukraine.

Dimon dismissed the recent stock market bounce. “Right now, it’s kind of sunny, things are doing fine. Everyone thinks the Fed can handle this. That hurricane is right out there down the road coming our way. We just don’t know if it’s a minor one or Superstorm Sandy. You better brace yourself.” he added. Still, he cited the strength of the consumer, rising wages and plentiful jobs as the “bright clouds” in the economy.¹

Causes for Concern

There are two main factors that have Dimon worried:

The Federal Reserve is under pressure to get runaway inflation under control. Their plan is to shrink the economy by raising interest rates. They will also reverse its emergency bond-buying program and shrink its balance sheet. So-called quantitative tightening, or QT, is scheduled to begin this month. It will ramp up to $95 billion a month in reduced bond holdings. The Fed will be followed by other major central banks in the first ever round of global QT.

“We’ve never had QT like this, so you’re looking at something you could be writing history books on for 50 years,” Dimon said. Several aspects of quantitative easing programs “backfired,” including negative rates, which he called a “huge mistake.” He acknowledges that central banks don’t have a choice. There is simply too much liquidity in the system.²

Stocks have been hammered as investors prepare for the end of the Federal Reserve’s cheap money era. Stock prices are also dropping on fears that the Fed will push the economy into recession as it tries to tame inflation.

Dimon’s concerns for the market deepened since last week. During the response to the 2008 financial crisis, central banks, commercial banks and foreign exchange trading firms were the three major buyers of U.S. Treasury’s. The players won’t have the capacity or desire to soak up as many U.S. bonds this time, he warned. “I’m prepared for, at a minimum, huge volatility, ” Dimon said.

The other large factor worrying Dimon is the Ukraine war. It is roiling commodity markets around the world. The prices of oil, gas and wheat are being severely impacted. Oil could hit $150 or $175 a barrel, he said.³

A top Goldman Sachs Group Inc. executive echoed Jamie Dimon’s pessimistic tone, warning of tougher times ahead amid a string of shocks rattling the global economy.

“This is among — if not the most — complex, dynamic environments I’ve ever seen in my career,” Goldman President John Waldron said Thursday. “The confluence of the number of shocks to the system to me is unprecedented.” He fears that risks from inflation, changing monetary policy and Russia’s invasion of Ukraine could kneecap the global economy.⁴

Dimon said JP Morgan is preparing for that turbulence by being conservative with its balance sheet.⁵

In the face of an impending economic hurricane, safe haven assets are crucial to protecting the value of investments. The Gold IRA from American Hartford Gold is designed to help investors weather financial storms. Contact us today to learn more. 800-462-0071

Notes:
1. https://www.cnbc.com/2022/06/01/jamie-dimon-says-brace-yourself-for-an-economic-hurricane-caused-by-the-fed-and-ukraine-war.html
2. https://www.cnbc.com/2022/06/01/jamie-dimon-says-brace-yourself-for-an-economic-hurricane-caused-by-the-fed-and-ukraine-war.html
3. https://www.cnbc.com/2022/06/01/jamie-dimon-says-brace-yourself-for-an-economic-hurricane-caused-by-the-fed-and-ukraine-war.html
4. https://www.bloomberg.com/news/articles/2022-06-02/goldman-s-waldron-warns-of-unprecedented-shocks-in-echoing-dimon#xj4y7vzkg
5. https://www.bloomberg.com/news/articles/2022-06-01/jamie-dimon-says-bank-is-bracing-itself-for-economic-hurricane?srnd=premium

• Surveys reveal a majority of Americans are worried about their retirement funds
• Soaring inflation, rising interest rates and steep stock market drops are devaluing funds
• Retirees and potential retirees face stark choices to adapt to the changing financial landscape

Americans Are Worried About Their Retirement

For many Americans, runaway inflation is eating away more than just their take home pay. Inflation is threatening their future as it shrinks the value of their retirement funds.

Overall, people are very worried about their financial futures. Voya Financial’s Consumer Research survey found 66% are worried about inflation affecting their ability to save for retirement. That number jumps up to 75% when it comes to Millennials and Gen X. And more than 40% have tapped their retirement funds to cover their bills today.¹

Retirement funds primarily rely on the stock market. 2021 was a banner year for stocks. It gave some people the incentive to retire early. But rampant inflation, rising interest rates and recession fears are causing a sharp reversal. The S&P 500, the benchmark for many index funds, is about 17% from its all-time high in early January. The sinking stock market is fueling retirement fears.

Retirement planning is becoming more challenging as the investment landscape shifts. Bonds are losing their reputation as a safe haven. High inflation has made bonds, and the fixed payments they make, less attractive. One index of high-quality U.S. bonds has lost more than 9% this year. This is because the price of bonds goes down as interest rates go up. And right now, the Federal Reserve is quickly raising interest rates to get record inflation under control.²

Inflation is already punishing people with higher prices on everything from gasoline to food. And the rising rates to fight inflation may very well slam the economy into recession. A vicious progression is happening. Inflation is leading to rising interest rates. They lead to recession. And in turn, recession puts downward pressure on stock prices. Further reducing the value of retirement funds.

Inflation Is Breaking The 4% Rule

Famed financial advisor Bill Bengen first devised the 4% retirement rule in 1994. Since then, retirees have relied on this rule to help determine how much they should spend in retirement. The rule is relatively simple. You add up all of your investments. Then you withdraw 4% of that total during your first year of retirement. In later years, you adjust how much you withdraw to account for inflation.

This approach would have protected retirees from running out of money during every 30-year period since 1926. Even when considering the Great Depression, the tech bubble, and the 2008 financial crisis. However, due to the combination of high inflation and high stock and bond market valuations, Bengen believes his 4% rule is no longer adequate. Retirees will need to cut back on their spending to make their money last.³

What To Do

Historically, the stock market starts delivering positive returns within a year of a crash. But some people can’t wait to make up their losses. Many Americans now expect a significant shortfall in their retirement savings. The leading concern, according to the 2022 Schroders U.S. Retirement Survey, was that inflation would shrink the value of their assets. The second concern is becoming a reality right now- a major market downturn significantly reducing their assets. A great number of people’s portfolios are down 20% or more for the year.⁴

Americans on the cusp of retiring face a choice, stay on course or keep working. Some people are pushing back their retirement date in the hopes of waiting out the market. There are other advantages to waiting. Delaying retirement gives you an opportunity to snag higher Social Security benefits, boost your savings, and stretch your nest egg. And any of those things individually could set the stage for a more financially secure ride during your senior years.

Those who have already retired are picking up part time jobs. In line with the advice of financial planners like Bengen, they are also delaying major purchases or travel plans.

Social security is small comfort. It does have a built-in inflation adjustment, but it doesn’t keep up with real inflation. Pensions, for those few people who still have them, often max out their inflation adjustment at 1.5%.

A new paradigm is emerging as we witness the end of a 40-year bull run. For people facing retirement or recently retired, preserving value in the face of soaring inflation and a highly volatile stock market should be a priority. They should learn about how safe haven assets like precious metals can secure their retirement funds. For more information, contact American Hartford Gold to find out about their Gold IRA.

Notes:
1. https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/high-inflation-disrupts-retirement-savings-strategies.aspx
2. https://www.tampabay.com/news/nation-world/2022/05/24/stock-market-slump-unsettling-americans-eying-retirement/
3.https://www.usatoday.com/story/money/personalfinance/retirement/2022/05/20/retirement-4-percent-spending-rule-no-longer-works/50251755/
4. https://www.fa-mag.com/news/a-comfortable-retirement-appears-out-of-reach-for-most-americans-68040.html

• The S&P 500 is poised to become an official bear market
• Stock market selloffs are being driven by inflation, interest rate hikes, and global uncertainty
• The market bottom may not be hit until October, investors seek safe havens

Beginnings of the Bear Market

This summer is quickly beginning to look like bear season. The bull market is almost officially over. Stocks have fallen dramatically in 2022. The Nasdaq, down nearly 25%, is in a bear market. The S&P 500 is on a six-week losing streak and about 16% below its all-time high. Some analysts forecast a stock market downturn where losses exceed those of the 2008 stock market crash.¹

A bear market is, by definition, a 20 percent decline from the most recent market top. Technically, the Standard & Poor’s 500 stock index is in a “correction”. A correction is a decline between 10 percent and 20 percent.²

The S&P 500 entered correction territory last month. That is the second time this year. A tough April for stocks was followed by an even rougher May. Stocks plummeted as investors dumped megacap tech stocks. Netflix shares, for example, have plunged 75 percent. Online payment company PayPal is down 74 percent from its high.³

Investors bailed on formerly highflying favorites in reaction to unchecked inflation. As well as the Fed’s mad scramble to stop it with aggressive rate hikes.

Hopes that the April data would show inflation had peaked were dashed. The annual pace of inflation slowed to 8.3% from 8.5% in March. Moreover, a core CPI reading, which strips out food and energy, showed an unexpected monthly rise.

Based on figures going back to 1929, the average bear market sees a median fall of 33.2%. On average, it has taken 80 trading days for the S&P 500 to hit its low after entering a bear market.⁴

So stocks may need to drop a lot further before the market finally hits bottom. Especially since the Federal Reserve seems intent on raising interest rates more aggressively to fight inflation — no matter what happens to stocks.

“Restoring price stability is an unconditional need. It is something we have to do,” Fed Chair Powell said. “There could be some pain involved,” Powell added. “The Fed will continue to raise rates until they see a clear breaking of the inflation trend.” The sinking market is revealing the true value of stocks after the Fed’s price supports have been pulled out from underneath it.⁵

The big question is how much lower the US S&P 500 might fall. The good news, according to Bank of America strategist Michael Hartnett, is that “bear markets are quicker than bull markets”. Based on data gleaned from the last 19 of them, he reckons the S&P 500 “still has another roughly 25% downturn ahead of it from current levels”. The bottom, he suggests, might be hit in October. Though “a floor does not equal a new bull market for tech stocks.” They are likely to “remain in a bear market for the next two years”.⁶

How to Treat a Bear

Some advisors suggest that if you’re retired, don’t take withdrawals from your stock funds in a bear market unless you have no other choice. You won’t have income to cover your losses. And if your stock fund is down 15 percent and you withdraw 4 percent, your account will be down 19 percent. Withdrawals in a bear market just make things worse.

Instead, many financial planners recommend putting some funds in ultrasafe investments, such as gold. Gold acts as a hedge against the depreciation of stocks in your portfolio. To learn more about how a Gold IRA can protect the value of your funds, contact American Hartford Gold today.

Notes:
1. https://www.cnn.com/2022/05/16/investing/stocks-bear-market-federal-reserve-inflation/index.html
2. https://www.aarp.org/money/investing/info-2022/bear-market-field-guide.html
3. https://www.aarp.org/money/investing/info-2022/bear-market-field-guide.html
4. https://www.marketwatch.com/story/the-s-p-500-is-on-the-brink-of-a-bear-market-heres-the-threshold-11652381057
5. https://www.wsj.com/amp/articles/feds-powell-to-take-wsj-questions-on-inflation-and-economic-outlook-11652779802
6. https://www.theweek.co.uk/business/markets/956728/bear-market-how-long-will-the-carnage-last