Defining Recessions
According to JP Morgan, there have been 11 recessions in the US since the end of WWII. Recessions are defined as two consecutive quarters (6 months) of negative growth in gross domestic product or GDP. GDP is a measurement of our overall economic and business activity. Usually, when the economy is in a recession, the stock market will decline. The economy and the stock market are two separate things, but generally, move in the same direction. Over the course of the last 70 years and 11 recessions, the average market decline has been about 30%. The most significant being the last recession, The Great Recession, which began in October 2007 and ended in March 2009. Watch the video below as we break down recessions and bear markets.
What Causes Recessions?
Recessions can happen for a variety of reasons. Most recently, a crisis in subprime mortgages led to a housing market collapse, corresponding with a spike in oil prices. In the early 2000s, we had a brief recession following the collapse of the “dot-com” bubble. In hindsight, the reasons for why we had a recession become clear. As a result, you’ll hear the usual charlatans on TV and online claiming they could foresee what we just went through. They are usually selling something, like newsletter subscriptions or books. Feel free to ignore them.
It is incredibly difficult to predict where, when, and why we will have our next recession. Forecasting these major macroeconomic events is something economists and business leaders will spend much time on. As individual investors, you and I are more concerned with paying our bills and maintaining our standard of living than we are with the ISM manufacturing index and nonfarm payrolls. Sure, it’s good to be somewhat aware of the general direction and temperature of the economy, and (depending on the type of backyard BBQ’s you will attend this summer) makes for good small talk. However, a more fruitful exercise than market and economic forecasting for you and I would be to reflect on your own finances.
Review Your Plan
Therefore, you should look at your investment portfolio. There are certain statistical data we use as investors to gain insight into how our investments should perform. Past performance, while not useful in predicting future results, can at least give us some good information about our portfolios. If the market repeated its drawdown from 2007 to 2009, in which it declined by more than 50%, how would your portfolio hold up? If you held 50% US stocks (SPY), and 50% US bonds (AGG), you would have experienced approximately a 25% decline over that same timeframe. It’s important to run these hypothetical stress tests on your portfolio from time to time.
Next, examine your financial plan. As a retiree, or someone planning for retirement, has your portfolio declined by 25% in a 14-month timeframe? Can you still afford to pay your mortgage? Would you need to cut back on your spending at all? Will you still be able to maintain your standard of living over the next 20-30 years?
In a recession, typically we see an increase in the unemployment rate. A spike in the unemployment rate might not directly impact the day-to-day of a retiree. However, if you still have some time to go before you retire, a recession could mean a loss of income. Do you have enough saved up to continue to pay your bills for a prolonged period of time in the event of a job loss? Do you have a written budget, with areas of discretionary spending that could be cut back, if necessary?
Don’t worry about timing the next recession or bear market correctly. Instead, focus on your own financial plan. Are you prepared for the next recession?
Start the Conversation
Are you ready to start your financial plan? Or would you like to review your current plan? We’re happy to help. Modern Wealth Management provides no-obligation consultations with our financial planners. They will sit down and discuss all of your options and help guide you toward your one best financial life. Schedule a complimentary consultation below or call us at 913-393-1000 to start your journey to and through retirement.
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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.