Question: There's a lot of buzz about the next recession. Who knows when it will come, but it will. What smart strategies can I employ now in preparation for a downturn in an economy? What to do, what not to do?
Answer: We wrote our clients in our July 6th, “The Next Recession And The Next Bear Market” that “By 2019 we expect US employment numbers to turn negative, US unemployment rate to start rising, GDP growth to stall, perhaps even turn negative, and consumer confidence to fall.
After 8 years (2008-2015) of moderate growth with low inflation and extremely accommodative monetary policy, the Federal Reserve began lifting rates from the all-time low of 0.0% to the current 2.0%, and probably to 3.5% by mid 2019. Long term rates such as the US 10 year treasury, which drive corporate lending rates and mortgage rates have started moving higher, though so far only from 2% to 3%. We would expect that rate to move up towards 4% and even 5% in the next two years, which will have a chilling effect on housing prices and stock prices.
In particular, we’re worried about how the Trump administration tariffs will affect inflation. Already inflation is at 2.5-2.9%, which is above the 2% rate that the Fed normally targets. If inflation remained at 3% or above, we would expect the Fed to pick up the pace on increasing rates, which would reduce economic output on top of the disruptions caused in export markets. We could see a mild recession (2 quarters of negative growth) in 2019 as a result.
What to do?
If you have a substantial financial need in the next year (new car, child’s tuition, house down payment) take that money out of stocks now and hold in cash.
For longer term needs (more than 5 years out) such as retirement, keep invested in the stock market, invest more if stock prices fall
Be thoughtful about real estate purchases; higher mortgage rates mean flat or falling housing prices
What not to do?
Don’t yank long term money out of the stock markets. By the time you pay taxes and commissions, worry about when to get out, worry about when to get back in, you’ll probably be worse off than if you just left your stock exposure alone. Even investors that had the misfortune to buy stocks in September 2008 (right before stocks fell 55% during the financial crisis) were back to break even by 2011. Those that jumped out anytime between October 2008 and March 2009 were NEVER able to catch up.