By JULIA ANDERSON
A friend asked me last week if I thought there would be a recession and when would it happen.
The answer to the first question is easy …yes, there will be a recession. Like the ebb and flow of tides, recessions come and go. The last one in 2007-2009 was a doozy. Housing values cratered, stock markets fell and as Warren Buffett says, we found out “who was swimming naked.”
Those who had jumped into the house bubble were burned. It took years for values to recover. Those who panicked and sold stock holdings lived to regret their decision because they’ve missed the bull market rebound.
People without cash emergency funds were hurt, especially if they lost a job.
But look at the recovery --- 10 years later, housing values are back, markets are at record highs and consumers are confidently spending. Record high employment and low interest rates continue to juice the economy.
Recessions are a natural part of the economic cycle. Let’s hope our next one will be mild compared to the financial crisis of ten years ago.
Should we worry about a recession coming soon? Worry is the wrong word.
Let’s just be prepared for one when it happens. There are signs that our beloved bull market is getting tired. Manufacturing activity is slowing, housing prices are flattening as supply begins to catch up with demand, and home-building is slipping. Wage growth has improved but still lags rising costs, especially for housing. First-time homebuyers are priced out in many of our major cities.
Farm income is in the tank. Boeing’s 737 Max problems are a national economic negative and banks continue to struggle to generate robust profit. There’s a lot to weigh about the economy -- pro and con.
To answer my friend’s second question about timing, I told her I did not think we would see anything like a real recession until after the 2020 Presidential election. History backs me up. The S&P 500 Index of the 500 largest publicly traded American-based companies has only had three negative years out of the past 21 election years since 1928. (Just for the record, I don’t believe in betting on cycles or trying to jump in and out of markets).
Meanwhile, market and money managers (Federal Reserve Bank) try to stay out of the political fray, to hold an even keel. No dramatic ups or downs, so no, a recession is likely at least 18-months to two years away.
Of course, there’s always the unexpected: The trade dispute with China could continue, North Korea could do something stupid, the United Kingdom is being rocked by Brexit. The Russians, the Syrians, Iran. There could be trouble on many fronts. But has the world been much different in the past 50 years? I don’t think so even though some of my friends think the world is ending.
U.S. markets and monetary system have survived. The entire American free-enterprise economy is not going to go out of business overnight. So, I told her to stay positive. A recent Bloomberg News analysts’ survey has the spread is the widest in years between those who are pessimistic about the economy and those who are positive. That confirms my view: hang in there but be prepared for what hopefully will be a mild recession.
Years from retirement? Stay the course.
For those who are working and managing their tax-deferred investments but are years away from retirement --- Stay the course, remain invested in stocks, let markets drop in a recession whenever it arrives. Don’t panic, don’t jump, don’t sell. This is a buying opportunity to reinvest your quarterly stock dividend earnings at a cheaper price. Your dividends buy more stock, they in turn buy more stock.
Already in retirement and managing your nest egg, now?
If you already are living on income from your investments, create a cash fund to draw from during a recession. That’s so that you don’t have to sell your investment principal at a discount to buy groceries if share values decline.
Draw out of your cash fund to get through the market downturn. Keep the rest of your portfolio in the market, continue reinvesting at a discount. How much cash should you have on hand? How about 12 and 18 months, worth? More if our government goes back to the Democrats and taxes go higher.
It’s been so long since we’ve had a recession, we might be a little out of practice. The next one hopefully will not be as bad as the one we remember so well.
I meet women all the time who face job and money transitions and who want to do them right. It’s about building confidence and taking charge of the future. This is your money. No one cares more than you do!
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