While the U.S. is not in a recession yet, many economists say one is coming, and companies are preparing for one too. Further, the USD has been retreating in value against a basket of international currencies, especially against the Swiss franc, erasing the gains it had made over the year and increasing the pain of the incredibly high inflation numbers. To add to the further woes of the U.S. situation, the U.S. market rallies do not seem sustainable and continue to wane. On top of all this, there has been a constant flow of information this year about the number of companies announcing job cuts in the U.S.
It can leave U.S. investors feeling hopeless and without much guidance moving forward. So the questions are, will the job cuts heavily affect the economy and the markets? And what can be done to prepare for a challenging marketplace moving forward?
In October alone, job cuts announced by U.S.-based employers jumped by 13%, the highest since February of 2021. Since October, there has been a steady flow of companies announcing job cuts, often citing macroeconomic issues as the reason for the layoffs.1 While this seems like a copout by corporations, businesses, and companies, it is telling that they are worried about the impending recession that economists have been speaking about for the past year or so. The simultaneous issues facing companies of the increasing interest rate—making debt more expensive—and the poor market performance have made it harder for companies to raise capital. Even the Federal Reserve backed this opinion in its forecast for 2023, with unemployment rising to 4.6%.2 With existing debt to pay off and the bloated nature of many companies, they want to be able to traverse the next recession well. This may well be a reason many of the companies are going through a leaning process.
The Coming Recession
While many U.S. politicians, economists, and market analysts, spent the summer of 2022 arguing over the definition of a recession, the U.S. economy shrank.2 The official verdict on the definition remains in debate. Still, the U.S. remained adamant that "a significant decline in economic activity that is spread across the economy and that lasts more than a few months" was needed to declare an official recession. Since the unemployment rate remained low and the third quarter saw growth, no recession was declared. However, many economists continue to hold firm that a recession is impending as what can be taken to ease a recession—reducing interest rates and increasing government spending—will exacerbate the inflation issue in the United States.3 The takeaway is that a recession is coming, and since they are tough to pinpoint, companies are preparing for them to hit. Maybe it is time individuals do the same and reduce their risk or at least make sure their portfolios are ready to weather the recession.
Anyone invested in the U.S. market knows it has been a wild ride this year. The major indices have taken hard hits throughout the year, and at every rally, the hope of investors that the rally will be the final low, the rally failed, and brought investors back to their knees as they watch the markets drop. While it is important to remember that these losses can be recovered, the time horizon of the recovery can be further away as the downward trend continues. But what do job cuts mean for stock prices and the investment market? Some times job cuts can be healthy and improve a company by "trimming the fat," other times they can be a signal to investors that the company wants to go in a new direction, and sometimes it is because the company is in a bad financial spot and needs cash to deal with it.
Understanding the reason for the job cuts can provide valuable insight into an investment. One thing does seem to be clear about job cuts in relation to stock prices if it is the only change made to the company, it does not increase the value of a company's value on the market. This is because job cuts put out the message of instability to investors.4 While layoffs are not always bad for companies, laying off workers simply to report a more positive fourth-quarter balance sheet has not been a recipe for success. Instead, a company that is in reasonable control of maintaining its talent and balance sheet performs better in the long run.
When looking at how to combat these losses or how to decrease risk to a portfolio, there are some solutions to look into. Still, no perfect solution exists as the markets can be unpredictable, especially when they are as volatile as they have been post-pandemic.
What Can Be Done?
So what can be done to combat the deterioration of the U.S. economy, its effect on the companies within it, and its impact on the portfolios that hold those companies? The first is to take a deep breath and identify the emotions motivating your investing activities. Then, look for solutions to mitigate the risk facing your portfolio. Is your portfolio internationally diversified? If not, look to partner with professionals that can help you meet your financial goals. Wading into the waters of international investing can be challenging. As the regulations governing the foreign markets are different from those in the U.S. and having a partner with deep insight into the foreign markets will help you build a portfolio that will complement your existing portfolio in the U.S. Further consider how your wealth structure is set up. Are you holding all your eggs in one basket? Establishing an offshore bank account might be helpful to gain the benefits of a foreign jurisdiction that may be more stable than your domestic market and may add layers of asset protection to your wealth structure (you can learn more about other banking jurisdictions and what they can offer your here: Private Banking Paradise: Switzerland or Liechtenstein?).
Lastly, the foreign country may have a currency that holds its value better over time than the U.S. dollar; the uncomfortable reality for Americans is that inflation has been damaging the USD for a long time and now more than ever as inflation remains incredibly high. As the market environment of the U.S. deteriorates and seems to be careening for a recession, it is vital to know your options on how you can take action to protect your wealth for the future instead of letting the future happen to your wealth.
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