Recessions: Uncertainty suggests balance
Joel Dresang: Kyle, we’re hearing more about the possibility of an economic recession. Some forecasters are saying that we’ll see one by the end of 2019. Many more are saying that we’ll see one by the end of 2020. What sorts of concerns should investors have?
Kyle Tetting: You know, Joel, I think it’s important for investors to remember that the economy is cyclical, that we go through these periods of growth and then subsequent slowdowns. And that’s all part of a very typical cycle. I think the challenge is what does that mean for my investments? You know, are earnings going to slow down because a recession is near or a recession could come at any time? So, I think those are the kinds of fears that at least initially are weighing on investors.
Joel: For years now, I’ve been hearing that we’re in the latter stages of this business cycle. What makes us think that we’re in the latter stages leading up to recession?
Kyle: So, Joel, I think so many forecasters have just looked at the length of this expansion—you know, going on the longest on record. Certainly, it’s easy to say that at some point in time, it has to end because it always does. But, I don’t think we can look at length alone, in particular because we know that recoveries from financial crisis tend to be longer.
But, I think there are some signs that we can point to that tell us a little more certainly that we’re near the latter stages. We look at things like just a slowdown in economic growth more broadly, declining housing sales, declining car sales, and then especially look at what the Fed has done: Normalizing interest rates, moving things back to a more normal position, simply to position for what could be the latter stages.
Joel: So, what should investors be doing knowing that we’re getting closer to a recession, but not knowing when it’s going to be?
Kyle: I think understanding that cyclicality, and at the same time, understanding that stock markets tend to lead that cyclicality. You know, on average, maybe the markets are six months ahead of what the economy is doing. And so, it’s very difficult, first of all, to predict where the economy’s going to be, and second of all, to say, “Here’s what I should do for my portfolio.”
Ultimately, Joel, it’s so difficult to predict or to time this economic recession and also the market decline that tends to accompany that. And as a result, it’s so important for investors to have that balanced portfolio because it allows them to get through those periods of uncertainty without giving up entirely and without trying to figure out when the turn is going to come. It’s a matter of understanding that the market leads. It’s a matter of understanding that it’s so difficult to predict, and ultimately, it’s this balanced allocation—this appropriate allocation depending on your risk tolerances and your objectives—that allows you as an investor to really tolerate market movement.
Joel: How are investment strategies affected knowing that we’re nearing the end of the expansion period?
Kyle: Joel, in the latter stages of the business cycle, we tend to be leaning into areas of growth, but when you start to see the end coming, it’s a great opportunity to really start to realize some of those gains that you’ve had. Obviously, it’s been a great run for the stock market since the Great Recession—a great opportunity to really maybe pull back a little bit on your equity exposure.
And also a great opportunity to really take stock of what you have in fixed income and those safer bonds in your portfolio to make sure that you’re being compensated for risk there. To really improve your quality overall. To make sure that if we do see some slowdown, if we do see some more economic uncertainty, that your portfolio’s well-positioned for that.
Joel: So, if I’m a long-term investor with a balanced portfolio, does that mean I don’t have to worry about a recession?
Kyle: I don’t think it’s fair to say you don’t have to worry. Obviously, if you’re a business owner, if you’re an employee, if you’re a household, you know, all of those folks have something to fear because economic slowdown can impact you.
However, I think as an investor, as long as you’re properly allocated, as long as you have that balanced portfolio, you’ve positioned for those types of things. You’ve given yourself some places to hide when the market does turn for the worst and when the economy does slow down. While it’s maybe fair to say that you should be a little bit concerned about the coming recession, I think as an investor, you need to understand that balance is what will get you through.
Kyle Tetting is director of research and an investment advisor at Landaas & Company.
Joel Dresang is vice president-communications at Landaas & Company.
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(initially posted February 26, 2019)