Digesting the Noise
Posted by Financial Strategies Group in Blog Posts, Economic Update, Financial Planning 05 Dec 2019
We have all been hearing a lot of talk recently in the media about signs of an impending recession. You might have even heard about “inverted yield curves” and how we’re currently in the longest period of economic expansion. Also, people have expressed worry about the trades war going on with China. This all must mean that the shoe is about to drop, right?
When the noise (the news) starts to get too loud, we have to remind ourselves to stop and take a look at the underlying data. This is the time to focus on the facts, instead of the rhetoric. Gleaning from my experience as an examiner with the Federal Reserve Bank of Atlanta, let us start by looking at the definition of a recession. A recession is defined as a period of temporary economic decline, generally identified by a fall in GDP (gross domestic product) in two successive quarters.
Since GDP is a lagging indicator, we could already be in a recession, or even moving out of a recession before the data is conclusive. The US Bureau of Economic Analysis calculates and reports GDP for the previous quarter, 30 days after the quarter ends. So far in 2019, the Bureau has reported a 3.1% increase in GDP for the 1st quarter, a 2.0% increase for the 2nd quarter and a 2.1% increase for the 3rd quarter. This means that when looking solely at the GDP data, we are not in a recession. What might the 4th quarter look like based on the recent news of record Black Friday and Cyber Monday sales?
So, what is the current economic data telling us? The economy is slowing down, inflation remains low, and unemployment has bottomed out. Also, people tend to believe that a U.S. recession starts when you have massive layoffs, but that’s not true. What happens first is businesses stop hiring, and so far, that has not happened. One thing for certain is that uncertainty can cause paralysis, like political uncertainty. So, is our economy taking a pause to see which way the political winds will blow?
Given all that we have discussed, how should one prepare for a future recession, and how can we help make sure you’re prepared? The simple answer is that as your financial planners, we would prepare you in the same way we would if there was no recession on the horizon. This means, first always maintaining adequate cash reserves. Ideally, 3 to 6 months’ worth of expenses saved, and even more if your self-employed. Second, managing your debts and not becoming overly leveraged. Lastly, making sure that you don’t have money that you will need in the next five years exposed to the stock markets.
Attempting to try and predict when we will experience another recession is essentially the same as trying to time the markets. Research has shown time and time again that timing mistakes can cause more harm than good. At Financial Strategies Group, we wholly believe that maintaining a globally diversified portfolio during good times is equally as important as it is when riding out the storms, i.e. recessions.
Try to remember that when it comes to your financial plan, specific goals and timing were put into place for a reason and trust that it will stand up to the ebbs and flows of the market.
While there is no one-size-fits all strategy that we can incorporate, it’s important for clients and advisors to always maintain an open and often communication. Please don’t hesitate to send us an email or give us a call over any concerns.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Tracking #1-922903