Is this a CAT 1 or CAT 5 Economic Hurricane?
Jamie Dimon, the long tenured CEO at JPMorgan Chase, is highly esteemed in many finance circles. When he talks, the media listens. At a recent conference, he said of the economy, “a hurricane is right out there down the road coming our way. We just don’t know if it’s a minor one or a Superstorm Sandy.”
The economic hurricane metaphor turned a few heads, including mine. I am no stranger to hurricanes. In my previous career, I worked for FEMA contractors, hospital networks, and large datacenters to provide emergency fueling services to these mission critical stakeholders before, during and after storms. Hurricanes are serious storms, but just as Dimon alluded to, the magnitude of their destructive strength varies considerably. Wind speed is how hurricanes are measured. Category 1 and 2 are more common and typically less destructive. Category 3, 4, and 5 are considered major hurricanes; they are increasingly more destructive and less typical. Economic crises share similar gradations to hurricanes. The tough part with any future event - be it a storm or a recession - is forecasting if, when, and where it makes landfall.
Why does Dimon feel that a hurricane is looming off the coast of our economy? For one, the war in Ukraine and its impact on oil and food commodities are part of his concerns. Stubborn inflation pressure and the Federal Reserve’s response are his other concerns. Specifically, rising interest rates in combination with the process of quantitative tightening is something that is unprecedented, according to Dimon.
What to do?
Hurricanes sound scary, and they certainly can be. That said, more than 60 million Americans live in hurricane prone areas. Many of them are prepared for and understand how to contend with storm threats. Preparation and fortitude are hallmarks of successfully managing any emergency – an actual hurricane or an economic one.
How can you prepare for the next economic hurricane?
- Build an emergency fund of at least 6 months of cash or highly liquid assets. This is a smart and safe place to start. Learn more about emergency funds.
- Examine your investment portfolio. Are you highly diversified? If you have major concentrations of your wealth in specific assets like individual stocks, bonds, or real estate, you may not have the diversification you need. Allocating your money according to different assets and having diversity within those asset classes is critical. Diversification can simultaneously reduce risks associated with the overall market and inflation.
- Don’t panic. If you have a sound investment strategy (see #2 above), it’s important to remain disciplined. Don’t sell because you are fearful of a downturn. If you have the cash flow to continue to invest, it’s often advisable to continue to do so. The volatility of today should pay for growth tomorrow…that’s what the data suggests.
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