I have a confession: I’m rooting for a recession -- and a bear market. Of course, I don’t want people to suffer, but the longer both the expansion and bull market continue, the more we tend to forget that all good things must come to an end and make poor financial decisions as a result.
A bear market is defined as the index closing at least 20 percent down from its previous high close. There have been six bear markets for the S&P 500 over the past fifty years, according Yardeni Research. Since bear markets tend to occur about every three and a half years on average, we are a few years overdue.
Taking a look at where we are today, the US stocks are now in the second longest bull market on record, with the longest running from 1982-2000. Further, the S&P 500 has nearly quadrupled since bottoming on March 9, 2008. This month, the US economic expansion is celebrating a milestone. May 2018 marks the 107th month of the current growth cycle, making it the second longest in history, passing the 1960's Boom (1961-1969) that lasted for 106 months. The technology miracle of 1991-2001 that totaled 120 months remains the longest on record. This long lasting growth feels much deserved, especially after the painful impact of the Great Recession, which began in December 2007 and lasted until June 2009. At 18 months, it was the longest of any recession since World War II, according to the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), and it is widely considered the worst contraction since the Great Depression.
While a recession in the near future may be unavoidable, the good news is that recessions don’t last forever – on average, only about a year. Still, while conditions remain positive, it’s time for a refresher on what causes recessions.
Since World War II, there have been three main culprits: (1) an external “shock” to the economy, such as the early 1970’s OPEC oil embargo or the first Gulf War; (2) the bursting of an asset bubble (think 2000 dot-com stock bust or the bursting of the housing and credit bubbles in 2008); or (3) an overheating economy that results in higher prices, which in turn prompts the Fed to raise interest rates. (Fun fact: most economists believe that the next recession will likely be caused by #3.)
Just because the current expansion and bull market have been ongoing for the past nine years, it does not mean that all business will come crashing down imminently. However, as investors, we need to manage our financial lives knowing that both a recession and a bear market WILL OCCUR, regardless of the exact timing.
And while these relatively good times feel virtuous, they can also breed complacency, which is why I am rooting against them.
To fight that natural tendency to forget that bad times can occur, here’s a reminder of what you can do right now. And yes, I know that I am a broken record on these recommendations, but they really do work:
1. Revisit/Create your financial plan: As flight attendants remind us, “items may have shifted during flight.” The same goes for your financial plan—hopefully for the better, but regardless, right after tax season is a good time to update the game plan, including your savings strategy for retirement.
2. Maintain a healthy emergency reserve fund: For those still working, maintain six to 12 months of expenses (12 to 24 months for retirees) in a safe, liquid account.
3. Pay down that debt: There’s nothing like a recession and bear market to expose the dangers of carrying too much debt.
4. Maintain a diversified portfolio: …and don’t forget to rebalance by trading up assets to maintain your desired level of asset allocation
If you need guidance or advice navigating any of the above financial moves to prepare for a recession, a trusted CFP® professional can help you develop/update a financial plan, share best practices for building an emergency fund and paying down debt and assist in creating and managing a diversified investment portfolio.