Subscribe
Share
Share
Embed
Podcasts from Confluence Investment Management LLC, featuring the periodic Confluence of Ideas series, two bi-weekly series: the Asset Allocation Bi-Weekly and the Bi-Weekly Geopolitical Report (new episodes posted on alternating Mondays), and a new monthly Q&A format called the Confluence Mailbag.
Welcome to the Confluence Investment Management Bi-Weekly Geopolitical Report for 09/14/2026. I'm Phil Adler. Conservative investors, as a rule, construct their portfolios to, if not anticipate a recession, at least acknowledge the possibility of one. But in doing so, these investors may not fully participate in market rallies. But what if recessions are less common than they used to be?
Phil Adler:Are these conservative investors needlessly missing out? Confluence Chief Market Strategist, Patrick Fearon Hernandez, joins us today to address these questions and discuss the investment implications. First, Patrick, considering the stock market's recent performance, I'm wondering whether more than a few conservative oriented investors may be in this boat of over preparing for a recession. Has something changed in the way of economic cycles to make recessions less frequent?
Patrick Fearon-Hernandez:Well, hi, Phil. We think the answer is yes. The traditional business cycle hasn't disappeared, but we've noted how policymakers have become much more aggressive in preventing downturns from turning into recessions. Historically, recessions occurred fairly regularly as excesses built up in the economy and then got corrected. But since the great financial crisis of two thousand eight and two thousand nine, governments and central banks have developed powerful new tools to cushion future economic shocks.
Patrick Fearon-Hernandez:We saw unprecedented monetary interventions from the Fed, massive fiscal stimulus programs, and extensive regulatory measures aimed at stabilizing financial markets and supporting consumer demand. The result is that economic slowdowns are increasingly met with policy responses before they can evolve into full blown recessions. In many ways, we've shifted from an economy that accepted recessions as a normal part of the cycle to one that actively fights them at almost any cost. That's a major structural change.
Phil Adler:Before we go further, in spite of the pain, we sometimes forget that recessions do have some benefits, benefits that have not been realized lately. What is there healthy about a recession?
Patrick Fearon-Hernandez:Well, it sounds strange to say, but recessions can serve some very useful economic functions. On the supply side, recessions help remove inefficient firms from the marketplace. Economists often call this process creative destruction. Weak or poorly managed businesses that may have survived during good times are forced to close, allowing stronger and more innovative firms to expand and take market share. On the demand side, recessions tend to reduce inflationary pressures.
Patrick Fearon-Hernandez:Businesses become less able to raise prices, and consumers who maintain their incomes often experience greater purchasing power. Recessions also create opportunities in financial markets. Stocks, homes, and other assets often become available at substantial discounts. For example, during the great financial crisis, the S and P 500 price index fell roughly 57% from peak to trough, while home prices dropped about 30% nationally. Those who were able to invest during that period often generated significant long term gains.
Patrick Fearon-Hernandez:So while recessions are painful and disruptive, they've traditionally played a role in renewing economic vitality and creating opportunities for future growth.
Phil Adler:Well, you say that governments are much more apt these days to pull out all the stops to prevent a recession from occurring and that this began in response to the great financial crisis of two thousand eight and nine. Could you go into that a little bit further? What was there about this crisis that ignited such a response?
Patrick Fearon-Hernandez:Well, we think the great financial crisis was indeed the turning point. That recession was the most severe since the Great Real GDP fell about 4.3%. Unemployment eventually reached 10%, and the financial system itself came close to freezing up. The lesson policymakers took from that experience was that allowing markets to self correct carried risks that were politically and economically unacceptable. In response, the Fed cut interest rates to essentially zero, launched liquidity facilities, and pioneered quantitative easing.
Patrick Fearon-Hernandez:At the same time, Congress adopted large fiscal stimulus programs and extensive banking reforms. Those actions established both the institutional framework and the political willingness to intervene aggressively whenever major economic risks emerge.
Phil Adler:I imagine policies to address the financial crisis of two thousand eight and 2009 added quite a bit to the federal deficit. Then came the twenty twenty coronavirus pandemic. Did the federal government simply double down on previous policies designed to prevent a recession?
Patrick Fearon-Hernandez:That's exactly what happened. In 2020, policymakers essentially took the playbook developed during the financial crisis and expanded it dramatically. The Fed returned interest rates to near 0%, restarted quantitative easing, established emergency lending facilities, and provided extensive forward guidance. On the fiscal side, Congress approved several relief packages totaling in the trillions of dollars. These programs included direct payments to households, expanded unemployment benefits, support for businesses, assistance to state and local governments, and numerous other initiatives aimed at sustaining demand and preventing widespread economic hardship.
Patrick Fearon-Hernandez:The scale was unprecedented. Policymakers were determined to avoid a prolonged depression like outcome and were willing to spend extraordinary amounts of money to achieve that objective.
Phil Adler:And remind us, Patrick, what was the impact on the federal deficit?
Patrick Fearon-Hernandez:Well, the impact was enormous. The federal budget deficit reached some $3,100,000,000,000 in fiscal year twenty twenty, equal to about 14.9% of GDP. That was more than triple the deficit recorded the year before, and it was the largest deficit relative to the economy since World War two. Importantly, that surge wasn't primarily driven by a military conflict or a traditional emergency. It was driven by an intentional policy decision to replace lost private sector demand with government spending.
Patrick Fearon-Hernandez:That experience reinforced the idea that fiscal policy could be deployed on a massive scale to stabilize economic activity and asset prices.
Phil Adler:You make the point in your report this week that these really were novel policies in US history and that the rise of populism in today's world encouraged these policies. What has been the fiscal impact of populism?
Patrick Fearon-Hernandez:Well, populism has increased political pressure on policymakers to shield households from economic pain. For decades, many governments accepted recessions as a necessary part of the business cycle. But today, politicians face a much less tolerant electorate. Working class voters who experienced job losses, wage stagnation, deindustrialization, and economic in insecurity have demanded greater government intervention. As a result, fiscal policy has become more activist.
Patrick Fearon-Hernandez:Governments are more willing to run larger deficits, support industries directly, subsidize households, and intervene during periods of economic stress. In practical terms, populism has reduced the political appetite for austerity and increased the willingness to use public borrowing to maintain economic stability.
Phil Adler:Patrick, do you think that the longer a recession is delayed, the longer the working class and and the bottom half of income earners will stay stuck in a hole of high interest rates, lower savings, and decreased investment opportunities?
Patrick Fearon-Hernandez:That's certainly one possible downside. The benefits of recession avoidance are not distributed equally. Existing homeowners and stock investors often benefit because asset prices remain Younger households and lower income families may face the opposite outcome. If home prices rarely experience meaningful declines and stock prices avoid a major correction, it becomes harder for younger people to acquire wealth building assets at attractive prices. Higher asset valuations may protect existing wealth while making new wealth creation more difficult.
Patrick Fearon-Hernandez:Now that doesn't mean recessions are desirable. The unemployment and hardship they create are very real, but there are trade offs. Policymakers may be preventing short term pain while also reducing some of the opportunities that helped previous generations build wealth.
Phil Adler:And, of course, a delayed recession is good news for privileged investors who already hold high amounts of stocks. Now Confluence Investment Management is on record predicting a low chance of recession for the next three years. So should current investors be less vigilant about guarding against recession?
Patrick Fearon-Hernandez:I wouldn't say investors should become complacent, but they may want to rethink traditional assumptions. If policymakers are more likely to intervene aggressively at the first sign of serious economic weakness, then the probability of a deep and prolonged recession at any given point in time may be lower than historical averages would suggest. That has implications for portfolio construction. Investors who maintain excessively defensive allocations because they continually expect a recession may miss substantial market gains. At the same time, risk management remains essential.
Patrick Fearon-Hernandez:Recessions haven't disappeared. Rather, policymakers may be altering their timing, frequency, and severity. Investors should remain disciplined while recognizing that the policy environment has changed.
Phil Adler:Do these novel government policies of the last twenty years designed to prevent recessions come with dangers that we should be aware of?
Patrick Fearon-Hernandez:Absolutely. One really important danger is moral hazard. If businesses, consumers, and investors believe policymakers will always step in to rescue the economy, they may take greater risks. Another concern is the possibility of asset bubbles. Persistent support for markets can push stock prices, housing prices, and other assets to levels that are difficult to justify based on underlying fundamentals.
Patrick Fearon-Hernandez:There's also the issue of public debt. Running large deficits repeatedly can eventually raise questions about fiscal sustainability. And most importantly, intervention may not eliminate risk. It may simply postpone it. Economic imbalances can continue building underneath the surface for years before they eventually require adjustment.
Phil Adler:In other words, a delayed recession doesn't mean never again. Will a recession, when it does come, likely be more severe because of these government policies?
Patrick Fearon-Hernandez:That's certainly a possibility. If policymakers repeatedly prevent smaller adjustments, weaknesses and excesses can accumulate over longer periods. Debt loads can increase, asset valuations can become really stretched, and financial behavior can become more speculative. Eventually, if a shock occurs that government policies can't offset, the correction could potentially be larger than it otherwise would have been. I wanna emphasize that this isn't a prediction.
Patrick Fearon-Hernandez:No one can know with certainty, but the possibility exists that recessions become less frequent while the underlying risks become more concentrated. In other words, we may be trading frequency for magnitude.
Phil Adler:Finally, Patrick, will we be okay as long as economic growth rises more than the federal deficit, or is there a better way to gauge the possibility of recession?
Patrick Fearon-Hernandez:Economic growth relative to the deficit is certainly important, but I wouldn't rely on that measure alone. A better approach is to monitor a broad range of indicators. These would include labor market conditions, credit growth, corporate profits, consumer spending, business investment, financial system stability, inflation trends, and measures of market valuation. The key question is whether economic activity is becoming self sustaining or increasingly dependent on government support. If private sector productivity, capital investment, and real income growth remain healthy, the economy can continue to expand even with significant fiscal deficits.
Patrick Fearon-Hernandez:However, if growth becomes heavily reliant on government intervention, then vulnerabilities may be building beneath the surface. Ultimately, recession analysis is less about finding a single indicator and more about understanding the interaction between economic fundamentals, financial markets, and government policy.
Phil Adler:Thank you, Patrick. The title of this week's report is I miss recessions, and you can find a link to the written report on the Confluence webpage, confluenceinvestment.com. Our discussion today is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
Phil Adler:Our audio engineer is Dane Stole. I'm Phil Adler.