Are We In A Recession? You Asked, We Answered!

Hello and welcome back to another OmniStar vlog. Alongside me I have Phil and Roger. Thank you for joining me. We've decided to bring a special episode to you because of recent market volatility. In fact, this is going to be a mini series. It'll be a two-part series, so stay tuned for our second video as well.

July and August were relatively good months in the market, but September was a different story. Our phones have been ringing and our clients have questions. What are you doing to prepare for the next six months? Are we in a recession? Are we headed that way? Should I raise more cash? Should I get out of the market entirely? These are perfectly reasonable questions and we'd love to answer them for you.

Fortunately, there are individuals like Phil and Roger who have many years of experience in the financial industry who can help ease fears and provide reassurance when the market isn't making gains. Thank you for listening today, and we'd like to answer your questions, so let's get started. Phil, are we in a recession?

It's a great question. I think it's been asked a lot. I think we're in a recession. Short answer is yes, but depends on who you ask. We've met the test. Two negative quarters in a row would suggest that we're in a recession. We've had that. In fact, we might have a third quarter in a row, if you will.

The problem with this recession is there are parts of this recession that don't feel normal, in that we have low unemployment. We have some metrics that would suggest that we're not in a recession. On the other hand, inflation and those negative quarters of GDP, those things would point to recession. So I'd say we've met most of the criteria for being in a recession, perhaps not all of it. I think stay tuned. The others will eventually be met, and I think we'll recognize that we're in a recession.

I think, Spell, one of the weaknesses in reading recessions is you rarely know that you're in it until, or that you've been in one, until you come out of it. That's usually when you discover that you were in a recession. But yes, I think right now I think we're definitely in some kind of recession, and I think that recession could easily broaden as we head towards fourth quarter and into 2023.

And to add to that, we've also seen some of the leading indicators that shows that we should be in a recession or going into recession. Housing starts are way down. That's usually a sign of going into recession. The inverse yield curve, which has been inverse for quite some time now, that I think every time but one recession, that's been an indicator of a recession. So there are indicators out there that are showing if we're not in a recession, that's the direction we're heading, which is why I would agree we're probably already there.

Yeah, and if we're already there, we're not to the end of that period. We don't know when it will end. But I think you're exactly right, Roger. The yield curve has been a very, very reliable indicator.

Those are great points indeed. And Phil, you just mentioned that we don't know when the recession might end, but that is a question that we have received from our clients frequently: how long will the recession last? So what are you telling our clients about our thoughts? When will the recession end?

If you had a crystal ball, fortunately there's an answer. Unfortunately, we don't have a crystal ball, so the answer is we don't really know. What we do know is that recessions typically last less than a year. In fact, the average as of the latest readings is about 289 days. So recessions don't last forever, but they can be somewhat protracted, and when I say protracted, that generally would mean something on the order of a year.

Now, if you look at the yield curve that Roger was just talking about, if you look at the one year, the two-year treasury yields, those yields are pricing interest rates rising and staying elevated until around November or December of 2023. In other words, the Federal Reserve likely doesn't lower interest rates until we reach somewhere late in 2023. That doesn't mean the recession will last that long, but it's going to take something of a miracle to reverse the course that we're on.

Recessions have to occur. They have to occur. That's part of a business cycle, that's part of an economic cycle, and without them you'd have only one direction. That'd be up, and that's obviously, I think we can all agree, that can't happen, right? So we need a reset here and there.

The average recession, right at 10 months for that 289 days, could be three months to 18 months. This is some of the time frames that we have seen in the past. What we don't know, and the question we were asking earlier, are we in the recession, and if we are, have we been in it for a month or two months? If that's the case, then maybe we've got another eight months left on average. But I agree with Phil that I think the recession probably goes into late next year.

Does that mean the market's gonna be down for a year? No, it doesn't, because a lot of times the market will lead us out over the recession and why actually reverse well before the recession ends, just because typically that's the case.

Yeah, typically the market falls prior to a recession, or tends to lead us into a recession, tends to lead us out of the recession. So usually stocks begin to recover before the end of a recession. So when the worst part of the recession is over, people begin to regain confidence and maybe interest rates are lowered, whatever the case is. Typically what we've seen, we can look at history and know that generally we come out of recessions with a rising market.

So Roger, as the senior portfolio manager at OmniStar, you field a lot of questions from our clients, and one of the questions that we've received from multiple clients is: what do I do with the cash position in my portfolio? Are you raising more cash? So what are you telling people?

And that actually depends on each individual's situation. For those who are fully invested with OmniStar or in our portfolios, we have increased our cash position. We're up to about 10 to 12 percent straight cash. We've also added short-term treasuries. So I think it's very important to raise that cash, but never go 100 cash. We're not that good at timing the market. The old adage, it's not timing the market, it's time in the market.

So raising a little bit of cash, sticking with stocks that pay good quality dividends, ones whose cash flow is strong enough that their dividends not at risk. And some of those stocks now are getting great yields. As those price of stocks go down, the yield goes up, but we want to make sure their dividends stay constant.

Portfolios that use our option overlays, we've increased the covered calls, get them a little bit tighter, which is increased cash flow, increase downside protection. Strategies that use our naked put strategies, or selling puts, we've been able to set lower entry prices into our stocks, so when they do go in, the dividends even that much better, and they're getting cash to wait to buy stocks that we want to own, but at a lower price.

For those clients who are sitting on cash, or maybe new clients, or those who are participating in 401ks, right now this is a great time to dollar cost average. You put in a little bit each month or every two or three months. If you have a 401k and you're participating and you can afford to decrease your cash flow for your lifestyle, I would increase your 401k to the maximum you can do without sacrificing your lifestyle. Right now is a great time to do it. The market's on sale. Can we be down in three months? Absolutely, could we. But are we looking positive for a five to ten year time frame for those of 401ks? Absolutely. It's a great time to start dollar cost averaging.

Yeah, and that's wonderful advice. And so Phil, I'm going to turn to you now. Roger just covered some of the things that OmniStar is doing, but we've also been receiving questions from our clients about what are we going to do for the next six months, eight months, the next 12 months. So what is OmniStar doing different from what Roger just shared with us?

Roger made some really, really good points, and Roger, I appreciate you saying all those things. I think every client is different. Every client has a different set of needs, and some require more cash than others. However, cash is not a position that allows us to generate a dividend, to Roger's point, and so for an income investor may or may not be a good position in this market.

Fortunately, we have better interest rates, so yields have come up. Going to cash now, we can at least get something. Last few years, if you were in cash, it was basically a zero-sum game. There was nothing to be gained through cash. But today cash can be used as a real asset. And so when Roger says we have 10 to 12 and maybe even as much as 15 percent, depending on the client, those cash positions at least provide something, so that's a good thing.

What we don't want is a client to believe that timing the market, going to cash, it is a way to solve an incredibly difficult market, a recession, an economic condition that really no one can change. Now, having said all that, I think cash is relative to your needs. Staying fully invested, on the other hand, throughout the market's history, that's always been the better play. Staying invested means you don't have to time anything.

We do raise cash. That's a part of our technique, it's a part of our discipline, but we do it every day. We are watching the markets every day. If that's what you do, then you might get good enough to know when to raise cash or when to lower it, but to think you're going to time it perfectly is a fool's game.

To your question, Spell, what are we doing down the road? Look, we've used a discipline strategy for years, decades. We're not changing that. Our strategies will change in terms of the stocks we're picking, but that is a byproduct, or rather a product, of our strategy rules and sticking to the discipline of putting those rules to work and then executing when it's time. So we're not going to start making rash decisions. We're not going to start rebuilding our strategies. We know our strategies work. They've worked for decades, and we're not going to change that.

Doesn't mean that we won't raise some cash. Doesn't mean that we won't get a little more defensive or less defensive. Might change our dollar cost averaging a little bit based on technical data that we track. But I can sure tell you this: the portfolio managers that do the best are the ones that stick to a strategy and follow their discipline, and we're just simply not going to bounce around and try to come up with the latest greatest thing to mitigate the risk of this market.

The best way to mitigate the risk: raise some cash, redeploy that cash, stick to your discipline, check your rules, be sure that they are good, back test them. And we do that every year. In fact, we do it multiple times per year, but we have an outside authority that comes in to tell us if our rules are still making sense, and we will make slight adjustments. But right now we're going to stay the course. We know what we do works, and we're going to stay with that.

I think another important factor into that, and why we stick the course, is when we do our planning, this is what we plan for. We plan for a volatile market. We plan for down markets. We know every market's not going to go up every year, so we plan on this. And right now, majority of our portfolios are down less than half what the market return is. And as of this podcast, the market's down about 23 percent on the S&P 500. It was up a couple points today, or a couple percent today. But in general, I think down, we were about 25 percent at the end of last week. Today I think we're probably down around 23.

that's right. So when you say that we're down about half, roughly 12 on the end. Across our portfolios we're down anywhere from 10 to 13 percent. And so, but we've plan on that. That's part of your planning, and that's part of knowing that the market's going to be volatile as part of the long-term strategy.

Yeah, we might make some changes that looks good for three months, but we need something that's going to look good five years, ten years, 15 years. And that's what our back testing is for, to know that in a long-term portfolio we're going to perform pretty, we're going to perform well. We stick with our strategies and we plan for downturns in the market.

And I think that's a huge point that often gets overlooked, part of OmniStar and being a holistic firm. So as a wealth manager, we're not just managing the money, it's so much more than that. In fact, we say that in a number of brochures and things. We always talk about it being so much more than just that. So when we're designing strategies for a client, meaning investment strategies, we don't put those strategies in place until we've done the planning to be sure those strategies make sense for what you're trying to accomplish.

When you build it that way, to your point, Roger, so important to remind our clients we plan for this. That's part of the planning process. Then we know that our investment strategies, either they are the right ones or we need to make adjustments. But really it's the planning for their life, it's the planning for their long-term vision, their goals. Without that, if you're only working with an investment manager who doesn't have any idea of what those things look like at a personal level, suffice it to say, at least in my opinion, I don't know how they could manage your money if they don't understand what they're trying to accomplish. Right, so then it just becomes a rate of return game. I believe ours is much more than that. And so to your point, we plan for these things. These very downturns in the market are part of the planning process.

And I'll finish with this on that subject. It's, we've always talked to our clients, and a lot of clients, when they meet with a financial advisor, the first thing they'll talk about is their risk tolerance. And we always talk about, that's what can you go to bed comfortable with your portfolio doing. But I think in times like this it's so important to know not just your risk tolerance but your risk capacity. How much risk can you take, or what kind of downturn can you take in the market that's not going to change your lifestyle? None of it feels good. Nobody wants to say their account go down one percent. But is it possible that your account has the ability or the capability to go down 15 and 20 percent and it really not change your lifestyle? Doesn't feel good, but doesn't change your lifestyle. So it's really important to know what your risk capacity is versus just what your risk tolerance is.

Such a great point, Roger. We refer to that, at least internally, we call that the gut check risk tolerance. And nobody likes that. There's very few people who can truly stomach the volatility of a market, even when it's benign volatility. But you are exactly right, Roger. If all you think about is gut check, or can you sleep at night because the market's volatile, you will most likely invest the wrong way. You will invest so conservatively because you didn't like that feeling. And that's problematic, because we see a lot of young people investing like they're going to retire tomorrow, and they've got 20 years. And all of the data tells us that long-term time in the market much more important than timing the market.

Even though we have all that information, people still go with the gut check. Financial advisors still go with just a basic risk tolerate, risk tolerance questionnaire, and that's because that's what their compliance department requires. They never get into capacity for risk. So what might you need now? Will this change your lifestyle? If it doesn't, why would you invest like it does? It just doesn't make any sense. But that is the world we live in, and that's what we've been conditioned to do as investors. It's why the average investor underperforms a professional money manager every time. Average investor works on about a two and a half percent return, versus professional money managers are closer to the seven range. That's a huge delta. Great point, Roger.

Yeah, these are all great points. I'm sure that our viewers will certainly appreciate your insight. Phil, I know you tend to do more technical analysis. Roger, I know you tend to do more fundamental analysis. And I want to make the point that the next episode of this mini-series will dive into Phil's technical analysis and Roger's fundamental analysis as it relates to something that Phil mentioned in one of his points earlier, redeploying cash. So we've raised cash in our portfolios. In the next episode, and again, thank you for your questions, your questions are the reason that we wanted to bring this vlog to you, this miniseries to you, but as it relates to redeploying cash, we will look at strategies that we're ready to implement. So thank you for your questions, thank you for tuning in, and we'll see you in the next one.

Thanks for joining us on We're Talking Money. Be sure to visit us at omnistarfinancial.com, where you can learn more about how we provide value to our clients. So subscribe to the show and our newsletters, and drop us a line with topic suggestions for upcoming shows. If you enjoyed the show, we would appreciate you passing it on to a friend and providing a rating on iTunes.

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