The so-called “Great Recession” ended more than 10 years ago. Since then, the U.S. economy has been in the longest recorded expansion in history. But good times don’t last forever. Because you’ve probably been hearing a number of predictions about the extent and timing of the next recession, let’s review the facts. We’re here to help you be better prepared to weather the storm when it eventually arrives.
Anatomy of a Recession
The generally-accepted definition of a recession is: two consecutive quarters of economic decline as measured by GDP. (Gross Domestic Product: the total value of all goods and services produced nationally.) In other words, a recession is when the economy stops growing and starts shrinking. Recessions can come in all shapes and sizes, ranging from a tepid 6 months to an excruciating 18 months. You can learn more about the technical definition of a recession here.
Where Are We Now?
To be clear, we are not in a recession. The GDP growth rate has declined from 3.1% annualized in Q1 of this year, to the current growth rate of 1.9% annualized as of Q3 2019. Positive growth has slowed down, but it has yet to turn negative (See Figure 1). Moreover, there are a number of bright spots in our economy: unemployment is at its lowest level in decades, inflation remains under control, and consumer confidence is healthy.
Figure 1 US GDP Growth
Is a Recession Around the Corner?
No one can predict when a recession will occur, but there are some signs that the economy is slowing. The ISM (Institute for Supply Management) manufacturing index, which records global manufacturing figures, revealed that the manufacturing sector started shrinking in August and continued the downward trend in September. There are fears that this weakness in the manufacturing sector may bleed over and affect consumer spending. Additionally, the yield curve inverted temporarily in August, and S&P 500 expected earnings for 2020 have fallen. We shouldn’t ignore possible signs of an economic slowdown, but we can’t think the timing of a recession is always predictable.
How Bad Will the Next Recession Be?
Because the most-recent recession of 2008 was so devastating, we tend to think the next recession will be the same. However, since the late 1940s, there have been eleven recessions averaging 11 months in length. The surprising average return of the S&P 500 during the recessions? Only -1.5%. (Some of those recessions even saw positive returns in the market.) The next recession could be an extended and painful downturn, but it’s also possible that it could be a relatively-mild pullback.
How Do I Prepare?
There are steps you can take to reduce the effect any recession will have on your financial life:
- Build an emergency fund: Regardless of a recession, a good financial plan includes an adequate emergency fund. Having 3-6 months of living expenses helps you ride out a storm.
- Resist the urge to sell: There may be a point in the next downturn when you are tempted to get out. Realize that the worst time to get out of the market is at the bottom and doing so could do irreparable damage to your financial plan.
- Understand long-term trends: On average the market goes up more than it goes down. Since 1949, the average bull market lasted 71 months and returned 263%. In comparison, the average bear market lasted 14 months and returned -33%. Work with your advisor to shore up short-term spending goals and keep your long-term assets invested.
We will have a recession; cycles always end in a recession. No one can predict if it will begin soon or how long it will last. It’s possible that the current expansion could continue for another 6-12 months (or more) before the next recession begins. We advise taking measures to shore up short-term needs and to stay invested when the next recession arrives. It’s our privilege and responsibility to guide you through this process. Please contact us if you’d like to have a deeper conversation.
We hope you have a great November and we wish you a Happy Thanksgiving!
|S&P 500 Composite (Large Cap)||2.17%||23.16%|
|Russell 2000 (Small Cap)||2.63%||17.18%|
|MSCI World Ex-US||3.23%||17.24%|
|Barclays US Aggregate Bond||0.30%||8.85%|