How are you going to navigate a recession?
Your cash is getting eaten by inflation.
Stocks are way down for the year.
Bonds offer no place to hide.
Real estate is correcting too.
All signs are pointing to a recession.
How are you going to navigate a recession?
What is a recession?
While there is no consensus about how long a recession might last – there is general agreement on what it is and what it usually means.
Experts tend to declare a recession when a nation’s economy experiences negative gross domestic product (GDP), rising levels of unemployment, falling retail sales, and contracting measures of income and manufacturing for an extended period of time.
None of that is really good of course.
The C.D. Howe Institute’s Business Cycle Council National is an arbiter of business cycle dates in Canada. The council defines a recession as: a pronounced, persistent, and pervasive decline in aggregate economic activity – and did so back in May 2020.
Beyond C.D. Howe, there is a general consensus that a recession is officially judged as two consecutive quarters of negative economic growth.
While a bit painful, recessions are a natural phenomenon.
Check out this graphic, related to this point, from the Canadian Encyclopedia:
Recessions are therefore a natural part of how an economy works.
This makes recessions largely unavoidable – there is a natural cadence of expansion and contraction that occurs in our economy.
If a recession is happening – how bad could it get?
According to a recent RBC study, the average Canadian household could see a $3,000 reduction in their overall buying power in 2023.
This same report also predicts that Canada is entering a recession – soon.
During a recession, the economy struggles, people lose work, companies make fewer sales and the country’s overall economic output declines.
“Cracks are forming in Canada’s economy. Housing markets have cooled sharply. Central banks are in the midst of one of the most aggressive rate-hiking cycles in history. And while labour markets remain strong, employment is down by 92,000 over the last four months.” – RBC
The point where the economy officially falls into a recession depends on a variety of factors.
What causes recessions?
There is certainly more than one way for a recession to start. Here are some drivers:
- A sudden economic shock: An economic shock is a surprise problem that creates serious financial damage. The coronavirus outbreak, which shut down economies worldwide, is a good, recent example.
- Excessive debt: When individuals or businesses take on too much debt, the cost of servicing such debt grows. Growing debt can trigger defaults. The mounting housing bubble in Canada is a good example of this driver. Congrats Toronto, you win! Toronto is officially the bubbliest housing market in the world. Thanks to Visual Capitalist for this awesome graphic.
- Asset bubbles: When investing decisions are driven by emotion, bad economic outcomes can occur. This can extend beyond just real estate. Irrational exuberance inflates stock markets or asset classes in the stock market. When the asset bubble pops, panic selling can occur too.
- Too much inflation: Central banks like predictability. So does the stock market. Inflation isn’t a bad thing but excessive inflation is bad. Inflation was out of control in the 1970s. History might repeat.
- Too much deflation: While runaway inflation can create a recession, deflation can be even worse. Deflation is when prices decline over time, which causes wages to contract, which further depresses prices. Japan struggled with deflation throughout most of the 1990s and well beyond.
Will a recession trigger a depression?
These are not the same things though.
Recessions and depressions have similar drivers, but the overall impact of a depression is much, much worse. Depressions can last in years, not months or quarters. As far as I know, economists do not have a set definition for a depression even though they have occured.
The Great Depression started in 1929, and hit rock bottom in 1933. I took almost a decade after that for things to really recover and flourish.
Recession vs. Depression
A recession usually lasts for less than one year. The risk of a recession is that it can last for a longer time – turning into a depression. Though there are no hard and fast rules that define what constitutes a depression, it can be characterized as a long period of time with mass unemployment, falling prices, low incomes, and a persistent lack of confidence.
The C.D. Howe Institute’s Business Cycle Council created a classification system for recessions, grouping them together by category. According to the council: “Category 1 recessions have only a short, mild drop in GDP and no decline in quarterly employment. At the other extreme, Category 5 recessions involve extremely rapid contractions of the economy over an extended period of time.”
|Monthly Peak||Monthly Trough||Category 1 to 5|
|October 2008||May 2009||4|
|March 1990||April 1992||4|
|June 1981||October 1982||4|
|January 1980||June 1980||1|
|December 1974||March 1975||2|
|March 1960||March 1961||3|
|March 1957||January 1958||3|
|July 1953||July 1954||4|
|April 1951||December 1951||3|
|August 1947||March 1948||2|
|November 1937||June 1938||5|
|April 1929||February 1933||5|
Source: C.D. Howe Institute Business Cycle Council.
Canada has experienced five recessions since 1970.
These recessions usually last between three to nine months.
This means you should at least prepare for that.
How might a recession impact you?
Let me count thy ways.
- You might or could lose your job. Unless you are in a recession-proof industry, like frontline healthcare delivery, it might be challenging for you to find a new role when more people are unemployed.
- If you keep your job – your total compensation might not keep up. Even folks that keep their job, they might see wage freezes or changes in total compensation benefits that get eaten up with inflation.
- Investments are likely to lose value and be volatile. Investments in stocks, bonds, real estate and other assets can lose money in a recession, reducing your retirement savings/portfolio balance.
- Business owners tend to profit less. As an entrepreneur, you might have to fight for you business. Many businesses may find it hard to retain customers or attract new business. In turn, business owners may have to lay off some of their employees or cut hours in an effort to save money. This could even affect high-performing employees or the best-of staff.
- Bad luck and bad timing for new grads. If you’re a recent graduate, it could be a challenge to find any meaningful employment in your desired career path. Some of the companies you may want to work for could be laying off staff, which means hiring a new grad is the last thing they think about.
- Borrowing money tightens. With more people unable to pay their bills during a recession, lenders tend to tighten borrowing standards for mortgages and other loans. You might need a better credit score or a larger down payment to qualify for any loan.
What are the personal finance solutions for a recession?
To recap, there are many drivers for a recession:
- Sudden economic shocks
- Excessive debt
- Asset bubbles
- Too much inflation or too much deflation.
This means as a student of personal finance and investing on my site, you can consider the following, the flipside to these events:
- Build your savings to work against economic shocks. This way, with cash-on-hand or fixed-income assets, you have a larger emergency fund to cover periods of income disruption and any sudden income shocks to your household.
- Avoid consumer debt and kill off your highest debts. If you have a mortgage still, that’s probably enough. Pay it off. Consumer debt will be more costly in a recession when budgets are tighter. Where possible, as always, avoid lingering consumer debt.
- Practice diversification to avoid major asset calamity. All-in on a few stocks or stocks in just a few sectors (i.e., like tech as a growth sector) could be risky to your financial situation. Consider diversifying your stock assets to avoid owning too much of what could be one bad thing.
- Stay the prudent course. Mind your spending. Keep a budget. Be mindful of fees you pay to others. Recessions come and go, eventually, so don’t let your emotions get the best of you near-term when your financial plan is designed for the long-term.
How are you going to navigate a recession summary
I believe if your long-term financial goal is to build and enjoy a happy and healthy form of retirement, you don’t want to miss any chances for great returns. Those returns can come out of a recession.
The latest economic boom has been largely driven by housing. All good things usually come to an end.
Like this recently CBC article rightly pointed out:
“Like the stock market, the state of the housing market can often indicate the direction the economy is headed.”
I think from that article Murray Mullen said it best:
“We’re seeing cracks, we’re seeing some slowdown, we’re seeing consumers be a little more cautious right now with their spend,” said chief executive Murray Mullen.
“Recessions are a time just to pause and get things back in balance,” he said. “Sometimes it’s a necessary evil.”
- Increase our cash wedge as we strive towards semi-retirement.
- Control our debt burden/pay off the low-rate mortgage we have in the next 18 months.
- Maintain our modest savings rate for investment purposes.
We can all worry and loose sleep over another upcoming recession but by taking some small matters into our own hands, and understanding this recession is quite natural like the ones before it, it’s probably best we don’t.
How you can invest to succeed with higher inflation is found here.
How long do stock market corrections even last?
I have been focused on my work for a while. Well, feel pretty lucky I didn’t retire last year when I almost pulled the trigger when the market was hot. Also feel blessed my job is not stressful and quite stable.
When I first began to build my portfolio, I wanted to build a DGI portfolio exactly for times like this. Last year I have chased growth and that part of investment down a lot this year. Fortunately, our RRSP portfolio still sticks to DGI strategy.
I feel I need to recalculate the retirement plan now with the high inflation rate, although my plan for retirement stays the same: enough dividends for basic living expenses and selling some stocks for discretionary expenses. But the bar for basic living expenses obviously now becomes much higher. Our household spending went so much higher this year with inflation and we began to travel. A trip to Costco can easily end up with a $500+ bill. With both of us still working, not a problem. But retirement is quite different. Just feel needs to be more careful and considerate when planning for it.
Awesome, May. You seem much less stressed for work (?) now?
The bar is definitely higher for all of us, inflation impacts everyone for sure. It is my hope rising dividends help cover off inflation but never any guarantees of course, which means you need to be able to ratchet down spending from time to time. I’m sure you can do that knowing a bit of how well you’ve planned for things!
All the best,
Yeah, after I am ready for retirement, working becomes quite pleasant. LOL.
As both of us might continue to work for a few years, most likely we don’t need to lower living standard after retirement. Just have my finger crossed.
Ya, ready for part-time work soon. See post today 🙂
I’m just doing the same in this bear market as I do during bull markets. I look for companies that seem to be unloved and unwanted and I buy into them to own for the long term.
Our spreadsheet showed we could add more to the Canadian consumer discretionary sector so this morning I bought more XTC. This company now has a dividend yield of 6% and has been increasing it’s dividend at an average of over 5% each year for the last few years. The market doesn’t like it though. Perhaps because it’s “not” recession proof or maybe other investors know something that I don’t know. We’ll see moving forward.
I’m not an analyst so as always do your own due diligence.
Ya, I suspect the masses might be scared off due to any yield over 6% signalling instability to pay shareholders. Just a hunch. I don’t own XTC myself. Beyond yield, why the company? Seems down quite a bit since 2015?
Although I have lower yield stocks in the portfolio, mostly I like to own the higher yields over 3%. That’s what gives us the cash from dividends to add to any savings we may have in order to purchase more shares. We own four other companies in the Canadian consumer discretionary sector but our spreadsheet shows XTC has the lowest percentage of assets in that sector, and since it appears cheap to me, I added more shares to Exco. Also XTC management appears to me to be shareholder friendly towards dividend investors. Time will tell if this will continue.
It’s not all success. There’s always the one’s that disappoint. So far, no dividend cuts in 2022 for any of the thirty two Canadian dividend companies we own.
I keep this simple. I just keep building up the lagging sectors in our own portfolio with any ready cash. Right now we own seven Canadian sectors and no sector has less than 10% allocated in the portfolio. I just concentrate on the dividend income we get from this taxable portfolio. Capital gains (if any) come a distant second.
As I’m the type who likes to just stay in the background, throwing out my two cents worth every once in a while, I humbly thank you for your kind offer of an interview Mark, but I shall have to decline.
Thanks for your rationale. All good. I hear ya. There are likely some of my stocks on the verge of a cut (I hope not) and I continue to own a few Canadian stocks for the dividend/distribution income, even though capital gains of late have been terrible. RioCan is one of them. I was thinking it should grow more with all their capital investments… Maybe over time. At least REI.UN is only <1% of my portfolio should another dividend cut occur.
32 stocks is good, seems like lots of diversification/modest number of holdings. I’m close to that too as you know. Many of the usual names:
Banks (Royal Bank (RY), TD Bank (TD), and others).
Insurance companies (such as Sun Life (SLF)).
Pipeline companies (Enbridge (ENB) and TC Energy (TRP)).
Telecommunications companies (Telus (T)).
Energy companies (Suncor (SU), Canadian Natural Resources (CNQ)).
Utilities (Fortis (FTS), Emera (EMA), Algonquin Power (AQN)).
There are also industrial and material companies in my/our portfolio (like Canadian National Railway (CNR) and Nutrien (NTR)).
That’s always been my thesis as well – I try to buy the lagging sectors with new cash for any of the top-20 or so stocks in XIU.
As for the investor profile, thanks for replying and no obligation – if you change your mind you know where to find me 🙂
Have a great weekend,
Also, I should interview you for the site – in case you are interested 🙂
No obligation, but would be fun and informative.
Hi Mark: I have NA, TD and BNS along with Brookfield which I consider a bank that deals in real assets. I also have 3 pipelines, 4 utilities, 2 communications companies and 3 insurances companies. I also have industrial companies like Nutrient and RUS plus an airplane conglomerate in EIF. As you can see, I have a lot the same as you, but I refuse to buy stocks that are high such as CNR, WCN, CP, CSU, etc. It is a good strategy to draw down your RRSP. MY dad never believed in them, and I didn’t start one until 1988 and then I was laid off in Jan. of 1992 so there was no sense putting money in it after that. Now that I am past 72 every year money comes out of the RRIF and is added to the taxes as interest income. Everyone say’s ” Look at how much I saved in taxes” but they forget that it is deferred income taxes. You put your money in the plan, but you can’t touch it. You can touch it but you will pay a withholding tax on the part you touch so most people don’t. If started early that can add up and then at 72 some is taken at the prevailing rate. I have a saying that it is not what you make, it is what you keep.
Ya, we seem to have very similar portfolios – like most Canadian DIY investors do. I’m not actively buying lots of CNR, WCN, etc. this year although I did buy WCN earlier this year as a defensive play and I bought more CNR a few years ago.
I fully understand the RRSP is deferred taxes, always been that way 🙂
Thanks for your detailed comment.
Hi Mark. Great site. Very helpful.
I would be curious to get your opinion of Canadian Utilities (CU on the TSX). You list Emera and Fortis and AQN as key utilities in your portfolio. CU doesn’t seem very sexy the last 3 to 4 years but it is a known dividend king.
CU is not overly sexy to me and I dropped it a few years ago to be honest.
Google the chart from 2012 – ten years ago – the stock is essentially flat for returns.
Now, I have no idea if EMA, FTS and AQN or CPX wil all preform better in the coming 10 years, I really don’t, but it is my hope 🙂
I feel total return (dividends + capital gains) matters. This is why indexing works for many, they don’t have to have any stock selection.
PS – thanks very much for the kind words 🙂
I am curious what your thoughts are on Nova Scotia’s recent cap on rate increases and it’s impact on EMA’s future earnings. Thanks for sharing your thoughts.
Not a fan, JF, but EMA will likely fight back a bit. Government intervention is not very smart on their part but governments are very political entities. I think EMA is still a good “bond-like” income stock to own.
When I was very new to DIY investing prior to looking at your site and other sites I bought a lot of CU, unfortunately your impression seems correct. Their dividend increases of the last several years have been paltry. Now I’m just waiting for the stock to go up again to the point where I can make a profit from the sale of it instead of a loss.
I’m still holding out hope for AQN.. Don’t know much about CPX.
Thanks for reading and your comment.
Ya, the challenge is, CU, every stock, and hindsight are 20/20. I generally like utilities in my portfolio, both CDN and US for income and growth but CU in particular wasn’t going very far IMO recently and going back further, the last 10-years haven’t been great either. I used to own a small bit of CU years ago but moved into other stocks to be honest. I recall the price was $40 in April 2013…
AQN should rebound, I think but it will take time/years. Maybe a buyout?!
CPX has been very good to me. I started buying that one about 2011-2012 or so. We’ll see about that one long-term!
Hi Mark: Being single my wants are few. Up until 1990 we used a full- service broker but found the commissions were cheaper through a discount broker so we then started buying through Waterhouse. Over the years a lot of stock has been transferred to Waterhouse. This has happened when a stock was sold or thought to be sold as was the case with BCE so now, I only have a few at home and I try to live off those few dividends. The only time I use Waterhouse other than to buy stocks is to replenish my chequeing account at TD Canada Trust so I can pay my instalment payments to Revenue Canada. If I need something than I go and buy it, but if there is no pressing need than I don’t. My time of year is fast approaching as I buy for everyone at Christmas even though the rest only want to buy for the kids.
I assume you also own a few bank stocks, along with your ENB and BCE?
I keep most of my top-holdings updated, down this page here:
#1 live within your means, then the others you listed if possible.
Thanks Lou, simple does seem to work best for most things in life but good behaviour is tough!
Thoughtful piece. Impact of inflation is an important consideration for most people operating their households or a business, saving and investing, staying employed and looking for income raises.
We’ll keep operating the same as we have. Stay careful with good value on shopping, stay invested in equities that pay and grow dividends, keep a portion in hisa and gic’s. Allocate a good portion to energy/oil stocks.
Thanks. I hear ya. We’ll continue to live within our means, kill debt, and save $$ for semi-retirement where we can. It’s been a boring 20-year journey but I’ve realized over time, like exercise, other facets of life – you just need to have some discipline extended over time. Simpple is not easy though!
Good plan! Yes, simple is not easy. Nothing truly worthwhile is.
Very good point!!