Hello Everyone! These blogs are meant to inspire financial awareness from an economic, business, individual and behavioral sense. I hope you enjoy!
Back to Blog
There are countless financial doomsters out there who are always selling fear through the fact that we are facing an impending downturn next year. Sometimes, I find amusement looking at these videos several years later when an economic downturn never actually occurred. I write this article to spread awareness on the fact that we are long in the tooth in this aged bull-market and I want to provide possible triggers that could spark a downturn. I took a poll a few days back and approximately 75% of the voters thought a 2020 recession is going to occur. This post is in response to that. Please note I am not trying to get my audience to go into full panic mode by selling all their equities for cash, doomsday bunkers, precious metals, ammo, and canned food. I want to provide practical insight to the average individual and investor on how to ride out a 2020 recession.
Historically recessions occur about every ten years and the last one we had was in 2008. On March 22nd of 2019 this year we had an inverted yield curve which has predicted many financial crises within one to two years of it happening. Additionally, the FED is pumping more than $100 billion a month into the economy which is essentially propping up asset prices and sustaining growth. The FED additionally has lowered interest rates on 7/31/19 and 9/18/19 to improve consumer spending and borrowing. These are two pillars that help economic growth, so I wonder if the FED did this being at the helm of the ship to avoid unpleasant waters. What caused the 2008 recession is likely not to cause a 2020 recession because many regulations, policies, and lending standards have been stiffened up to ensure borrowers can service their debts adequately. Two primary things that are likely to ignite the long-overdue recession would be slow in trade between the U.S. and China and the 2020 election. Now, many other things may cause a 2020 downturn, but these are two primary unknowns that can jolt the market significantly depending on politics and policy. There is a slow in trade between the U.S. and China since the 25% tariffs on imported goods to the U.S, and I don’t see any benefit for having this in place from a financial perspective since we are essentially reducing our volume of purchases with higher cost goods from China. In concern of the election, investors and companies are likely to demonstrate more restrictions due to certain programs that could negatively impact the economy. This silence is essentially the calm before the storm.
What can individuals do to prepare for an impending recession? Smile, because you are getting a jump-start and are being proactive with your situation! Now is the time to plan and stress tests, not when we are in the midst of the recession. I won't bore anybody with repetitive content but as a reminder please ensure all high-interest debt is paid off and an emergency fund is fully underwritten. If a recession is coming, it’s just like being a farmer preparing for a long drought or famine. You need to prepare by cutting costs and doing what it takes to make it through the long winter. This is a great opportunity to work on a side business, get a promotion by taking on more work or taking a part-time job. I think it would be relatively risky to change employers and industries right now, but if you have low overhead go for it as long as you have discretionary income and an emergency fund. This is the best time to take advantage of all company perks because you don’t know if you will be impacted if layoffs occur (squeeze those benefits dry)!
What can investors do to prepare for a recession? Be prepared and start fortifying now! Something significant is bound to happen soon. S&P growth is expected to grow in 2020, but not as much as in 2019 (same with GDP growth). I remember in February of 2017 when the market dropped more than 15%, I panicked and sold some of my investments. To date, this was my biggest investing mistake and the key lesson to learn is to keep emotions out of investing. When you see the market sliding down 3,4 or even 5% look at it as a sale, not a loss. Can those emotions and think logically, unrealized losses are exactly that. Unrealized. When you add to your position at a time like this, you will obtain a much larger upside, while concurrently dampening any losses. When investing, try to look at historical data to see what investments withheld the 2008 recession (recession-proof high dividend-paying stocks with low payout ratios). Another thing that should be done is to re-balance and further diversify your investment portfolio and in doing so you will reduce risk. Purchase high-quality bonds rated (AAA) and stocks with low debt and high dividends to ensure income. This will help significantly offset volatility. You should be in cash but try not to be over deployed in this area. Try to always be aware of what brings the highest returns. In this case, the highest yielding savings accounts bring about 1.8% APY whereas inflation is about 2% YOY, so you are losing .02% which can be many Starbucks trips every year depending on your account balance. 😊