Honey, I Shrunk the Economy

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Welcome to May!

It’s the month of the year named after the Roman goddess of growth and spring, but you may be feeling disappointed with some of your once-shiny growth stocks. The overall stock market is down nearly 10% this year, but growth companies have fared particularly badly. The S&P 500 Growth and Nasdaq 100 indexes have lost 16% and 18% in value, respectively.

This is partly due to disappointing earnings from the dominant Big Tech growth companies like Amazon and Netflix (say goodbye to password sharing). The other reason is concern about interest rates hikes. Federal Reserve Chairman Jerome Powell increased interest rates on Wednesday and spoke about the need for a “tighter monetary policy” (code for raising interest rates again soon) that will increase the cost of capital for everyone looking to borrow money. While the Fed's tools are blunt and impact all companies, the increase in interest rates could adversely impact many growth companies focused on innovation, a group that is of particular interest to FWIW readers, as they usually need more capital to fund their new or expanding operations.

What does all this mean for you as an investor? As FWIW readers know, ignoring the short-term gyrations of the market and remaining focused on long-term trends and outcomes has been the way to go historically. As this chart from LPL Research shows, despite the trepidation, stocks typically perform quite well during rate hike cycles, and trying to time the market can lead to big misses. We dig into how an investor who thinks a recession is coming should look at their investing below, but paying off debt (particularly debt that has a variable interest rate like your credit cards), and ensuring portfolios are diverse (e.g., not just owning FAANGs) to reflect the changing market are priorities for most investors now. In addition, with higher inflation weakening the value of savings, financial advisors recommend moving cash sitting on the sidelines, after creating an emergency fund, into investments.

News you can use

• On Saturday, 100% of California’s power came from renewables. For the first time in history, all of California’s power needs were produced by renewable energy, with two-thirds of that clean power coming from solar. It was a significant milestone, but it only lasted for 15 minutes, reinforcing calls to expand the renewable rollout if California is to hit its clean energy targets.
  
• Stanford will launch a new school focused on climate change and sustainability, anchored by a $1.1 billion donation from John and Ann Doerr. The landmark donation, the largest ever received by the university, will power a range of new classes and research to accelerate the development of scalable climate solutions and is seen as an important step in building the climate change innovation ecosystem in the US.
  
• Corporate boards are bringing on more new members than ever. Executive recruiting firm Heidrick & Struggles reported a record high 43% of Fortune 500 board seats were filled by first-time directors in 2021, representing an unprecedented injection of new talent onto corporate boards worldwide. 45% of these new directors are women and 41% identified as racially or ethnically diverse.

Special May referral bonus: FWIW mug

‼️ Swag Alert ‼️ For the month of May we’re adding a bonus to our referral program! Now, when you receive your first reward (two people subscribe to FWIW using your personal referral link), you’ll not only receive a copy of the FWIW Guide to Starting Your Socially Responsible Investing Journey, you will also earn a limited-edition FWIW Mug. This special offer is only available in May. It’s super easy – here is your personal link to share: [link to sign up page].

“Siri, What is a Recession?”

Recession fears can sometimes feel like a monster movie. There’s the slow build-up with a looming threat, fearful chatter, and ominous symbols and signs that are hard to decipher. You may have noticed these tense vibes on the news lately as some experts say we may be headed for a recession. It’s still far from inevitable, but it’s a good time to mentally and financially prepare. Bogeymen, even of the economic variety, are a lot less scary that way.

Here are 4 questions you may have about recessions:

What is it exactly?

A recession is a significant decline in economic activity, which is measured as gross domestic product or GDP. A popular rule of thumb defines it as two consecutive quarters of declining GDP, but the National Bureau of Economic Research, the authority on such things, has its own definition. Millennials have dealt with more than their fair share of economic turbulence, but recessions are historically rare events (only 12 since the Second World War, as this chart shows) and are, on average, much shorter than the 2007-10 Great Recession.

Why now?

The economy can slow down for many reasons, like energy crises, financial bubbles, wars, or rising interest rates. If the Federal Reserve raises rates too fast as it fights inflation, the attack on Ukraine expands, etc., spending may slow dramatically and people could lose confidence in the economy’s health, tipping us into another recession.

How are stocks affected?

Stock values built on an expanding economy drop when investors see a recession on the horizon since they can hurt company profits. Firms that sell essentials, known as defensive stocks, tend to outperform (candy is called recession-proof). These companies are focused on the consumer staples (medicines, food, toothpaste…), real estate, utilities, and healthcare sectors. Investors also dump riskier growth stocks, which partly explains why the FAANGs (and other techs) have lost their bite lately.

How should I manage my money?

1. Keep budgeting and saving to pay off any credit card debt and build an emergency fund cash cushion with three to six months’ worth of expenses. As CNBC’s Sharon Epperson said, “The number one focus for most people should be on eliminating as much debt as possible. As we’re seeing interest rates increase, that means the rate you’re paying on your credit card, the rate that you’re paying on your debt and on what you’re borrowing is going to increase. So you want to get rid of as much of that as possible.”
2. Consider adjusting your portfolio to include assets considered “safe havens” in times of inflation or downturn. Gold and Treasury bonds often are the first things that come to mind for financial advisors when they hear the R word. You can explore ways to invest in gold sustainably and there are a number of options for investors looking to move to bonds that are tied to interest rates so that they get a stronger return when interest rates increase. For example, look at TIPS ETFs (they invest in US Treasury Inflation-Protected Securities) or Treasury I-Bonds (yes, US citizens can buy bonds directly from the US Treasury — if they can get the very wonky site to work for them), as they increase and decrease with the rate of inflation.
3. Adjust your portfolio to invest in stocks and funds that have historically done well in downturns because they provide goods and services that people need no matter what. In the same way that you might choose to not upgrade your computer but will still go to the grocery store when times are tight, analysts recommend you think about areas like groceries (both the stores that stock them and the products that we all buy in them), health care, and real estate that is tied to rental income. For those of you who have become fans of ETFs, Consumer Staples ETFs could be a good place to start your research. We are also noticing a turn towards investing in companies that provide a dividend.
4. Finally, keep calm. Recessions are very unpredictable and timing the market is hard, so experts recommend focusing on your long-term financial goals by staying invested, ensuring your holdings remain diversified across the market to avoid being overly dependent on one or two sectors, and buying high quality stocks at a discount if you can.

Before you go -

Today is Cinco De Mayo. If you enjoy a drink of Mexican tequila or mezcal, raise a toast to the bats that pollinate agave and Rodrigo Medellín, the “BatMan of Mexico” working to protect them.