Is A Recession Coming And What Can I Do About It?

“When is the recession coming?”

As a financial advisor, I receive the question: “when is the recession coming?” on a regular basis.

My answer — “if I had a crystal ball to predict that, I’d be on my own private island now”—may seem comical, but the point I’m trying to make is: no one knows exactly when!

What I suggest instead is to create an investment allocation that you are comfortable with both in good and bad market times. Generally speaking, if you have a long-time horizon (i.e. you won’t be using this money for more than 10 years) than you typically can take on more risk.

Also, if you’re the type of person who doesn’t become upset about severe daily swings in the market, then you likely are comfortable with additional risk. In these sorts of instances, you may want more stocks in your portfolio.

On the other hand, if you log into your investment accounts daily and start feeling heart palpitations when you see any decreases or increases in account value, you’re likely risk-averse.

If you plan on using your money in under 5 years, you also may want to reconsider the level of risk you take on in your portfolio. In these situations, perhaps you’ll like to add more bonds to your portfolio. Remember, however, being too conservative with your money takes on its own risk: inflation.

Still unsure if you can tolerant the level of risk, you are taking on? Click here to take your free risk assessment and we’ll help you!

Now that we have that important point out of the way—create an investment allocation that you can live with in the good or bad times—we can move on to speak to the potential of a recession.

While we do not have that crystal ball, economists tend to look towards economic indicators to anticipate market recessions. I’ve listed six of these leading economic indicators below. Typically we need several of these indicators to be in troubled-waters before we see a recession.

Economic Indicators of a Recession

Inverted Yield Curve

“Yield” is how much interest a bond is paying an investor. Bonds also have a set maturity date—the date when you expect to receive your full initial invested principal (what you paid for the bond) plus interest paid to you.

Typically, the interest rate is higher the longer you hold the bond, the longer your maturity. When the yield curve “inverts,” this means investors are demanding higher interest rates for bonds with a shorter maturity.

This typically means that investors are wary of the future. Inversions of the yield curve have preceded recessions for the last 50 years (source). We did see this inversion occurring back in May 2019, which caused investors to pause (source).

Consumer Confidence

This is a measurement of how consumers are feeling about the economy. If consumers are feeling positive, they will spend money, stimulating the economy. If they’re worried, consumers tend to spend less, take on less debt, and save more.

Unfortunately for us, the consumer confidence index dropped by 10 points on Sept. 25th. Such a drop in one month is “quite unusual” according to our CIO Brad McMillan (source). This may be a signal that the end of the economic expansion is nearing.

Gross Domestic Product (GDP)

Simply put, GDP sums up the prices of all goods and services produces by a country’s economy. So, if GDP is growing, the economy is growing.

First-quarter of 2019, GDP was fairly strong at 3.1%, likely still feeling the effects of the 2017 Tax Cuts and Jobs Act (TCJA). Unfortunately, the second quarter of 2019 was met with slowed GDP growth at 2%.

The message here is that our economy is still growing, but at a slower pace (source).

Employment

Low unemployment typically means the economy is doing well.  There is plenty of work to be done and employers are hiring.

When the economy slows down—companies are selling less and therefore bringing in less revenue—employers tend to cut hours or even lay people off. Unemployment remains at 3.7% (source), which is under “full employment” at 4%-- a good sign! New job creation continued in August, with 130,000 new jobs (source).

This is all good news, however, job creation is slowing, which may be a signal that economic weakness is nearing.

Overall based on these indicators, investors are certainly more cautious. Things are slowing down and a recession may be on the horizon. The exact timing? I still don’t have my crystal ball to predict it.

Remember, often we don’t know when we’re in a recession until, well, we’re in it. What I mean by that is, recessions are defined as two-quarters of negative GDP growth. Meaning a recession, by definition, is backward-looking!

So what should you do to prepare for a recession:

Analyze Your Risk Tolerance

Make sure you’re in a portfolio that you’re comfortable with, recession or not. Test the portfolio with historical data. While past performance is not an indicator of future results, seeing how a 2008 market would have affected your portfolio will elicit a certain emotional response from you. If you don’t think you could handle a 2008-like scenario, it’s likely time to reassess your portfolio.

Remember, the Market Rewards the Long-Term Investor

Recessions are short periods of time for the long-term investor. These year-long recessionary periods are simply blips on the radar of a 10+ year expansion. Don’t put all of your money into cash after the recession. Remain invested and ride out the storm.

Revisit Your Financial Plan

A financial plan creates a roadmap that provides you with clarity – and peace of mind—that regardless of what the market does in the short-term in the long-term you’re on track.

Make Yourself Indispensable

If you’re still working, make yourself invaluable at your firm. Get another degree. Learn another skill. Pick up additional work at work. Therefore, if a recession does occur and your employer must let someone go, if you’re invaluable, hopefully it won’t be you.

Start Networking Now and Brush Off Your Resume

Often people start networking too late. Once a recession hits and many people are laid off, your boss from your first job at that little tech start-up will be emailed by many people. Make sure you have strong relationships now, get your resume in front of a few other people, just in case you’ll need it.

Establish an Emergency Fund

Keep 3-6 months’ worth of living expenses in liquid, non-invested assets. This way, in case you do unfortunately lose your job during a recession, you can maintain your mortgage payments and other living necessities as you search for your next opportunity.

By establishing an emergency fund, you’ll create an easily accessible safety net which will ensure that you won’t be forced to sell off your investments in a down market.

Key Takeaways

After 11 years of an expanding market, a recession is expected, it’s just a matter of “when.” While no one can predict that exact date, what we can do is build a portfolio to withstand both bull and bear markets*.

Remember, don’t sell your stocks when the market is going into a recession. Rather, use a downturned market as an opportunity to buy high-quality stocks on sale! The key to getting through a recession is maintaining close contact with your financial professionals. Remember, you hired them and built trust with them to get you through both stable and tumultuous times!

Please contact us at info@johndrowwealth.com with any further questions or for a free risk analysis of your portfolio to ensure it’s allocated in a way that you’re comfortable with, regardless of whether or not you experience a recession.

Written by Magdalena Johndrow

Maggie is a Partner and Financial Advisor at Johndrow Wealth Management. She attended Providence College and the London School of Economics prior to beginning her career on Wall Street at Barclays and JP Morgan. She has taken her experience with high net-worth clients and used it to empower families and small businesses.