This recession is of a unique kind. Its been labeled transitory, sticky, and rolling.
While some sectors of the economy are contracting, others have remained resilient and are somehow expanding. Despite the strong economy and jobs market, consumers are still feeling the pinch in their pockets as a result of the cost of living crisis.
Definitely, the polarizing and paradoxical nature of this recession - some say we are not yet in a recession - has defied textbook definitions of what a recession is.
Another way this recession is different from others is that it appears to be affecting those in the upper class more than those in the middle or lower classes. This has been labeled by some as a 'richcession'.
Let’s explore what a richcession could mean and how you can invest in one.
When a recession is on the horizon, the poor and lower middle classes are often hardest hit. They usually experience greater job losses, have fewer savings to lean on when paychecks run dry and, once the economy recovers, the skills they have to offer might no longer be in demand.
The rich on the other hand usually don’t have to worry too much. They’re usually in a good position to ride out the rough economic times, the last to be affected and the first to recover value. But in the case of a richcession, wealthy Americans could feel a unique pinch on their budgets.
A richcession is the opposite of what usually happens during a recession. Rather than the poor and middle class being affected, a richcession significantly affects the wealthy. As a result, the rich see their value and net worth depreciate.
On the other hand, the middle and lower classes see their net worth preserved or even increased.
You may be wondering how the lower and middle classes may be able to see their net worth increase, while the wealthy are seeing theirs plummet. However, if we look closely at the US economy, signs of a richcession abound.
Two big indicators are the layoffs in the jobs market and the plummet in asset prices. Let's have a look at them.
Job cuts have impacted tech workers who are highly skilled jobs and earn fat salaries. Many of the companies cutting jobs are in industries that boomed despite, or because of, the pandemic’s upheaval. In 2022, more than 1,000 tech companies laid off an estimated 150,000 workers.
This year, the pace of layoffs has not slowed down. Tens of thousands of tech workers have lost their jobs again due to layoffs in 2023. This time, the biggest tech companies like Google, Amazon, Microsoft, Yahoo, and Zoom are trimming their workforce.
Startups in all fields, from crypto to enterprise SaaS, have also announced cuts.
On the contrary, companies in the construction, retail, tourism, and hospitality sectors are expanding their workforce. Restaurants, mining companies, construction and manufacturers are struggling to fill vacancies of frontline workers.
Wealthy people usually have a good investment portfolio as part of their net worth. Since many investors choose to put at least some of their wealth in the stock market, falling stock prices will affect the wealthy.
As worries about a recession keep the economy in the news, it's not a secret that the stock market has taken a hit. If stock prices keep going down, even investors with a lot of money could see their net worth go down.
When combined with the increase in layoffs in highly skilled well-paying jobs, a major stock market hit definitely leaves wealthy people in a more precarious situation than past recessions.
Even though this looks like a richcession, this does not mean that middle and low-income earners are immune from its effects. On the contrary, they should be on guard and take preemptive steps to reduce its effects on their finances.
Though some have defined this recession as a rolling one, it is important to note that each sector of the economy is connected to others. As such, there are bound to be spillover effects because so many industries are dependent on each other.
For example, if EV companies do not place orders for spare parts and other machinery due to slowing demand, this would affect manufacturing companies. The hospitality and tourism sectors depend on the wealthy to thrive.
If the richcession continues to impact those in the upper class, these sectors could see their revenues decline.
Also despite the recession appearing to hurt the rich more, credit reports show that borrowing among the middle class and lower class is skyrocketing. There’s a limit to how much debt people will be able to take on and at some point, it will hit a wall.
People will have to cut back on their spending in big ways and dial back plans.
Every economic situation presents silver linings which can only be seen by those that are not overwhelmed by the process.
Here are some steps you can take to take advantage of the richcession.
Share prices have taken a beating this year. This means stocks of quality companies can be gotten for cheap. This is an opportunity to add stocks that you believe have strong fundamentals to your portfolio.
Remember, the economy operates in cycles. The fears of recession will subside and investor confidence would be restored and stock prices will go up again. You want to make sure that you are well positioned when the next bullish tide stars, not chasing stocks.
While a richcession may be hurting highly skilled workers that are top earners, the reality is that their services will still be in demand.
Given the pace of technology adoption and digitization, a lot of jobs will still be created in these high-paying sectors. As such, this is an opportunity to upskill and potentially increase your income when the next hiring cycle begins.
One overlooked asset which could bring returns for investors is EE bonds. These bonds are a low-risk way to save money. The bond tenor lasts for 30 years, though you can cash them beforehand.
One major benefit of investing in EE bonds is that the value of your investment is guaranteed to double in about 20 years. This extra cash helps you to beat the effects of inflation or recession on your investment.
Treasury Inflation-Protected Securities (TIPS) are bonds that adjust the value of the principal to counteract the effects of inflation.
TIPS are tied to inflation to protect investors from their money losing value over time. TIPS don't raise their yield when inflation goes up. Instead, they change their price (principal amount) to keep their real value the same.
This makes TIPS a good investment during a richcession, recession, or inflation.
A coming richcession might hurt the rich more than others, and more than usual.
But a recession of any kind will likely impact households across the financial spectrum. If you are worried about a potential recession, rather than take a passive investment approach, why not flip the script?
Invest in quality stocks that are trading at bargain prices. Upskill and prepare yourself for the next hiring cycle. You can also invest in EE bonds and TIPS to protect the value of your investment.
March 23, 2023