Over the past year, experts have debated whether we're on track for a recession -- and the verdict is that it's looking more likely by the day.
Analysts at JPMorgan Chase believe there's a greater than 50% chance we'll face a recession at some point in 2023, and officials at the Federal Open Market Committee are now expecting a "mild recession" by the end of the year.
But there's at least one person still hopeful that the U.S. will be able to avoid a recession: Federal Reserve Chair Jerome Powell. What are the chances that we'll really be able to skirt an economic downturn, though? It depends on a few factors.
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How the U.S. could avoid a recession
Despite the Fed recently raising interest rates for the tenth consecutive time, the labor market remains strong. The U.S. added 253,000 jobs in April, according to the Bureau of Labor Statistics, up from 236,000 in March. Powell believes that this consistent strength of the labor market can result in a softer landing for the economy, potentially avoiding a recession altogether.
However, a strong labor market also means that the Fed may need to keep interest rates raised in an attempt to lower inflation, which has remained stubbornly high despite repeated rate hikes. That, itself, could potentially spur a recession. At its latest meeting, the Fed seemed to indicate that it would pause interest rates in the future. Should that be the case, an end to rate hikes might help Powell stick a soft landing. But even so, there's how sticky inflation will prove to be and how long the currently high rates may remain in place.
The crisis within the banking industry has also complicated matters. Higher interest rates could reduce consumer spending, forcing businesses to cut jobs and thereby making a recession more likely. Tighter lending standards as a result of the recent bank failures may also amplify these risks. Still, Powell has expressed confidence that the banking crisis is largely resolved, going so far as to say last week that the recent sale of First Republic to JPMorgan Chase "kind of draws a line under that period" of regional bank volatility.
None of these indicators mean that a recession is definite. But, for Powell's hopes of a soft landing to become reality, the economy has several obstacles to overcome.
What can you do to prepare?
Times like these are stressful for even the most seasoned investors. So, if you're concerned about how a potential recession may affect your investments, you're not alone.
Nobody -- even the head of the Federal Reserve himself -- can know for certain whether a recession is looming. Therefore, perhaps the best thing you can do right now is take steps to prepare for the worst -- so that you're ready for whatever may happen.
1. Double-check your emergency fund
The stock market may have further to fall if a recession is on the horizon. That said, it's best to avoid pulling your money out of the market if at all possible. If you withdraw your savings when prices are lower, you may end up selling your investments for less than you paid for them -- locking in those losses.
When you have at least three to six months' worth of savings stashed in an emergency fund, it's easier to leave your investments alone in the face of an unexpected expense or job loss.
2. Keep a long-term outlook
When we're in the thick of a downturn, it can be tough to stay optimistic. But even the worst recessions are only temporary, so it's only a matter of time before the market and economy are thriving again.
The average recession since World War II has lasted around 10 months. But the periods of growth between recessions normally last, on average, around four to five years. While the hard times can be tough to stomach, the good times, historically, last far longer.
The market itself also has a fantastic track record when it comes to recovering from downturns. Excluding the current slump, the S&P 500 has faced 21 downturns of at least 20% since 1929. And it has a 100% success rate when recovering from them. Regardless of what the future holds, it's extremely likely the market will rebound.
3. Start preparing for the next bull market
The stock market is forward-looking, meaning it often experiences fluctuations ahead of the economy. This can be both a good and bad thing.
During economic slowdowns, the market will often take a hit first. Case in point: All three major market indexes have already entered a bear market in the past year, even though we're not officially in a recession yet.
But the good news is that the market almost always recovers ahead of the economy. In fact, in nearly every recession over the past 50 years, the S&P 500 has started its rebound before the economy reached its lowest point, according to analysts from JPMorgan Chase.
The next bull market will likely begin sooner than you think. By continuing to invest throughout the market's low points, you'll be well-positioned to take advantage of the inevitable rebound.
This year hasn't been easy for investors, and recession concerns aren't going away. Regardless of what happens in the near term, though, the market's long-term outlook is incredibly promising. By taking steps to prepare now, you can ride out the storm and keep your money safer.
