A Two Drink Minimum

Today I’m talking about a possible recession, and there will be a two drink minimum…

I’ve been getting several text messages and emails asking about recent and ominous news warnings of a looming recession. What is this about? What should we do? How should we react? Are we going to survive?

Media Frenzy

First off, the news vultures should always be taken with a grain of salt. Even “market experts” should be viewed with caution. For instance, at the beginning of this year, almost 70 economists were polled by the Wall Street Journal and asked to forecast treasury rates by June. Their average forecast was 3%, the actual rate was 2%, and it sits below 1.7% as I type today. Suffice to say, this scenario was not predicted, so I’m not sure what follows will be predictable either. I don’t lend any credence to the pundits on CNN breathlessly counting the “point drops” of the Dow…

In addition, media bias against Trump is unquestionable. The media knows that if they can hang a recession on him going into the fall of 2020, it increases the chances of him losing a re-election bid. Therefore, the media is going to do all they can to will a recession into existence. Every piece of “bad news” will be reported exhaustively and exaggerated to the “n-th” degree. This will distort reality and make it difficult to objectively determine what economic information may truly mean in the broader scope of the economy – hence our two drink minimum…

Are We Inverted?

The latest media frenzy is an inverted yield curve. What in the heck is that? Normally, longer term bonds generate higher yields than shorter term bonds. However, as I write, the 3 month Treasury yields 2% while 2 year & 10 year Treasuries yield a lower 1.6%. This is unusual, and historically a good indicator that a recession will follow. However, the “lag time” between this inversion and the beginning of a recession is historically somewhere between 10 and 22 months. No need to panic, the sky is not falling. We’re very early into this warning sign. Take a sip…

The Big One

Our last recession was “The Great Recession” of 2007-2009. That means someone who is 30 now would have still been in college when that economic downturn took place. Today, at 30, they may have investable assets, savings accounts, a 401k, a house, maybe a Roth, and possibly children. In 2007 they probably had a math test to worry about. In that time of recovery we’ve experienced one of the greatest economic expansions in history. The stock market has seen meteoric gains. Raise your glass!

Two Factors to Consider

Factor One – not all recessions are like “The Great Recession”. It’s easy to look back at 2007-2009, see the 35% drop in the market, and think of that as what happens in every recession. The fact is, the average recession going back to The Great Depression sees the market dip about 6%, and the average market dip in a “correction” is around 13%. I have no way to predict what will happen next, but that is our reality. Take a sip…

Factor Two – not all decades offer 14% annual returns. since 2009 we’ve seen the market average almost 14% per year, which is amazing! Young people who have just begun investing may have a hard time realizing the market has extended periods of going up, but it also has extended periods of going down. I’ve invested through the ’90-’91 recession, the dot-com bubble, the 9/11 attacks, and The Great Recession. I’ve seen several ups and downs. A 30 year old has really only seen ups and ups. A 30 year old may need another drink over the course of the next year or two if the market starts gyrating. Stocks can, and will, see extended drops in value. Take a sip…

Consider Your Horizon

Your time horizon is everything. A 30 year old investing for retirement beyond age 60 can turn off the tv and forget about recession as it relates to their long term savings plan. Stay the course, invest regularly, and carry on.

Short term, it’s always good to look around and check your blind spots. Shore up your emergency fund for 6 to 12 months of expenses. Check for leaks in your budget. Eliminate debt that is dragging you down. Honestly asses your job situation and consider your exposure to layoff or downsizing in a time of economic downturn. Have a plan and then a backup plan.

I don’t know I’d stock the pantry with thousands of gallons of bottled water and tons of dried field rations, but I might take a look around to make sure I’m ready for whacky time. And then I’d take a sip…

Conclusion

A long-term investing plan means your goals do not change with your emotions, market fluctuations, or Rachel Maddow’s cycle. A well diversified portfolio needs time to grow and it actually needs these market fluctuations to earn money over the long haul. The market is going to drop. It’s going to drop 20% or more at some point in time. If you can’t stomach that, you need to work with an advisor to re-allocate your assets into a mix that will offer a smoother ride. Obviously this will limit your upside and your earning potential over the long haul, but there is a balance to be had relative to your risk profile – just as some people like to slam shots of tequila and others like to sip mellow scotch or fine wine…

Cheers, and thanks for reading!

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