Are We Heading For a Recession?

A reader asks:

Inflation was already out of control. Now the war has made gas prices spike. How does this not end in a recession?

This is a valid question.

Inflation was already at its highest level in four decades before war broke out with two countries that are vital to the global supply chain of both energy and agriculture. This is going to make inflation worse.

This morning’s inflation number was 7.9% and that was before the war broke out putting us on the verge of an energy crisis. It wouldn’t shock me to see a double-digit inflation print in 2022.

The probability of a recession is much higher today than it was just two weeks ago.

Inflationary spikes don’t cause every recession but every inflationary spike has only been alleviated by a recession.

On the following chart I’ve highlighted every instance since 1940 that the U.S. has experienced an inflationary spike of 5% or more:

Each time inflation went over 5% in short order there was a recession either right away or in short order.

Here’s a list of these inflationary spikes along with the ensuing recessions:

The timing is the tricky part here. Sometimes the slowdowns have occurred after inflation began to fall. Sometimes it happened concurrently. And sometimes the recession was going to happen anyway (like the Great Financial Crisis).

This makes sense when you think about it.

Economies typically go into a recession from overheating and excesses. An overheating economy tends to lead to inflation, which itself is a form of excess. The way those excesses get wrung out of the system is through a slowdown in growth and demand.

So it’s not a surprise that we would see inflationary spikes followed by recessions.

Recessions are obviously bad because lots of people tend to lose their jobs during a recession. You can see the upticks in the unemployment rate coincide with recessions:

If we do experience an economic contraction, it would occur in the face of the strongest job markets on record. Just look at the number of job openings right now:

The pre-pandemic high for job openings in the U.S. was 7.5 million. We’re now sitting at more than 11 million.

Obviously, the job market can change in an instant, as we saw in early-2020. But my hope is that a combination of a strong job market and sturdier consumer balance sheets would make for a minor recession if it comes to that.

As far as the stock market is concerned, there is a wide range of outcomes in terms of how it reacts to a recession historically:

This list is littered with some of history’s great crashes. But there are also some forgettable corrections and run-of-the-mill bear markets as well.

I don’t know for sure if we will go into a recession or not. If the past couple of years has taught us anything it’s that predicting the future is a fool’s errand.

But I do think it’s important for investors to prepare for a range of outcomes to help set realistic expectations.

There is now a higher probability today than there was just a few short weeks ago that we go into a recession.

We talked about the prospect for a recession and more on this week’s Portfolio Rescue:

Kevin Young also joined me to discuss questions about borrowing against your portfolio to fund a down payment and how to invest a lump sum of money in an uncertain environment.

Further Reading:
The Relationship Between Recessions & Market Crashes

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

The Compound Media, Inc., an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.