Recession Equals Opportunities for Black and Brown Millennials

Recessions and downturns are merely opportunities for those who stay prepared. Q3 and Q4 2022 will prove to be game changers in the long term, even though there will be bruises in the short term.

Summer spending is heating up.

While falling markets would typically scare people into saving and staying home, most are happily liquidating their savings or tapping into consumer credit. This is a perfect storm of “not-a-recession” arguments but try not to get distracted by the noise.

Table of Contents

Debt, Spending and an undefined Recession

The New York Federal Reserve reported that household debt climbed to $15.8 trillion in the first quarter of 2022.

That is up $266 billion or 1.7% from the previous quarter, and is $1.7 trillion higher than at the end of 2019 before the onset of the COVID-19 pandemic. Refer to the Quarterly Report on Household Debt and Credit report.

However by the end of Q2, the US Gross Domestic Product (GDP) fell 0.9%, the second straight decline. This follows a 1.6% decline in the first quarter. Both falling short of economists’ estimates.

We are officially in a RECESSION. One in which, the White House is desperately trying to redefine.

These headwinds came from a myriad of factors, including but not limited to an increase in interest rates; a decreases in inventories; a breakdown of the global supply chain; and, a slowdown in residential and nonresidential investment and government spending.

All of this falls in line with America’s global reversion to the mean. The next three years will cement two types of Americans, the Financially Instable and the Wealthy.

Opportunities and Challenges

The natural path of the modern free economy leans upward toward growth. This is crucial to remember during a slowdown. It’s also pivotal to know that this is an economic business cycle. This overdue correction is an opportunity for the next wave of investors to jump in where quality equities are cheap(er).

Especially while the social wealth gap is increasing.

According to U.S. Federal Reserve, in 2019, white Americans had a median family wealth of $188,200, while Black Americans had a median family wealth of just $24,100. With the Black community still in recovery, this next down turn threatens to take the median Black wealth to $12,000.

We can’t afford to seat idle waiting on solutions.

The state of the world

Since the onset of the Russian-Ukraine war, a global recession was highly likely. The long expansion since 2009 was fueled by historic low interest rates, a flood of liquidity primarily in the tech sector and government stimulus.

Rates are rising which will add around $5,000 worth of challenges for the average household.

On July 27, 2022, the Federal reserve issued its third rate hike of 0.75% with the Chair, Jerome Powell hinting at a total of 24 rate changes in the next two years. This will likely be an opportunity for short term gains since ever rate hike seems to raise market sentiment.

What do the rate changes mean to you?

The average credit card rate was recently 17.25 percent, according to Bankrate.com, up from 16.34 percent in March, when the Fed began its series of rate increases.
The average interest rate on new-car loans was 5 percent in the second quarter, according to Edmunds, up from 4.4 percent in the same period last year.
Federal student loan borrowers — whose payments are on pause through August — will likely benefit from a potential Federal loan payment pause extension as far out as summer 2023. Private student loan borrowers should expect to pay more.
Rates on 30-year fixed rate mortgages averaged 5.54 percent as of July 21, according to Freddie Mac’s primary mortgage survey, down from 5.81 percent a month ago but up sharply from 2.78 percent a year ago.
Lower-income Americans will continue to suffer from high inflation and rate changes.

Employment and Getting a Head with Cash Flow

In May of 2022, Black and Brown communities were the only ones to show improvements in employment. Officially, the Black unemployment rate measured at 6.2%.

However, it’s important to note that this is still nearly double that of White Americans at 3.2% — a ratio similar to pre-pandemic times — and well above the national rate of 3.6%. With increased talks of hiring freezes and sporadic layoffs, it’s important to remember that the last in are generally the first out.

Additionally, Black and Brown households trail behind others. According to research by non-partisan organization, the Peter G. Peterson Foundation, the median household income in 2020 for Black American households was $45,870 compared to $74,912 for white Americans. We have to get ahead in the income game.

As such, working on your soft skills from public speaking, to writing and reading will be key to stay prepared for future chances and job changes.

Furthermore, unlike in 2008, Black and Brown millennials and GenZers have higher savings rates and credit quality. With a majority of the younger generations embracing living staying with family longer, this presents an opportunity to create better cash flow which would lead to faster credit card debt pay offs and early investing.

Turns out, financial literacy is a way to close the wealth gap in America.

Dollar Cost Averaging (DCA) into a bear market is a great way to get ahead by 2025. With life is unlikely to return to pre-pandemic norms, cash flow is the new king and will open up opportunities to buy homes even if interest rates are higher.

A Global Setback for Most but a Set up for those who are prepared

Putting it all together creates a complicated outlook for the US and Global economy.

In addition to aging/retiring parents, Black and Brown households will have to contest with a mandatory change in lifestyle to keep up.

With the current administration attempts to revise the definition of a recession, your personal economy is unlike wins and losses of the stock market. Markets usually move in advance of economic data. While the sharp bull recoveries will materialize, it’s likely that many will make pivotal financial mistakes in the interim.

If you can you should hold off on retiring during this downturn to bring in more income and cover the expense while your invested savings recover. Eighteen months might be a long time to way but it’s another chance to booth social security benefits and work with a professional to devise a withdrawal strategy.

Fast recoveries are possible. They create massive opportunities for those who buy when quality stocks are cheap or at a deep discount. See graph below.

For example, in 2020 US stocks were down over 30% on March 23rd but finished the year up over 20%. In this scenario, we will likely wait a year or two to recover, it’s best to live like you are already in a recession.

Learning how to invest by Sectors

For the savvy investors, know that violent rallies will continue into 2023. As such, when it’s possible, my household is capturing some gains and holding in cash until another opportunity. Beyond that, it’s also crucial to learn how to invest based on the phases.

So far this year, Energy and Utilities have been the best performing sector but it will remain highly volatile. Consumer discretionary and Tech are both underperforming since one is based on each household’s excess cash and the other based on companies excess cash flow to invest in R&D.

As stated before, it’s also worth considering DCA into total market ETFs like $VOO or $VTI, in the short run or throwing up to $10k in a Treasury iBond. If you don’t need to use $10k for two years, at 9%, most investments aren’t beating it.

The Crypto Problem and Avoid the Get Rich Quick Strategy

A study by Ariel Investments found that, on average, Black Americans own significantly more cryptocurrency than their white counterparts. About 25% of Black Americans own crypto, and when examining investors under the age of 40, that number jumps to 38%.

So when crypto was down more than 60% for the year, Black Americans were hit hard.

Additionally, some crypto lending platforms promising high yields for lending dollars or crypto are proving to be insolvent. Beyond losing password locks, some platforms are locking investors out of their own money.

Binance paused bitcoin withdrawals while bitcoin investors lost $7.3 billion in three days. It’s insane. Young investors are losing big in this crypto crash which goes to remind people that getting rich quick is not a long term or short term strategy. Coinbase is not too far behind. To the point that the government might need to consider intervening going FWD.

Is crypto in trouble? Short answer, Yes.

Real opportunities aren’t shortcuts to riches and fame. In a few years, we will witness the collapse of the influencer’s personal economy.

The Financial Game Plan

Remember to limit your exposure and reduce your unnecessary expenses.

Turns out the boring advice still works. Matching and investing in your 401k (or equivalent) can be worth anywhere from half a million to multi-million dollars by retirement. Owning an affordable home is also a defined path that works. Paying off your credit card debt equal instant cash flow.

Getting rich generally takes 30 years if you follow a great financial plan.

Even sooner, if you download a net/max financial plan. The end goal is not glamorous but it doesn’t have to be, if it works. With the market down, this is an opportunity to set up wins for 2025.