Market pundits are all but promising a recession in the near future. Trade war headlines and weak manufacturing data are spooking investors, and a quick search reveals any number of armchair analysts suggesting this may finally be the big event to pull us into a Recession. Coupled with the fact that we are currently in the longest economic expansion in history, it’s easy to make the case that we are due for a recession.
Unfortunately, financial media outlets today are acting like a meteorologist forecasting a Category 5 hurricane. They seem to believe that like a hurricane, recessions:
- Forecast Easily
- Approach Rapidly
- Require Immediate Action
- Cause Permanent Devastation
Do hurricanes and recessions really have this much in common?
Meteorologists use satellites and specially equipped aircraft to gather information about wind speeds, rainfall, and barometric pressures of the storm. They take this data and create computer forecast models called spaghetti models, and based on the model, scientists can forecast a hurricane’s path with a high degree of certainty.
Does such a model exist for forecasting recessions? Quite simply, no. Economists have loads of historical data, economic models, and Nobel Prizes; yet they struggle to reliably forecast recessions. There is no alarm that tells us we are in a recession and attempting to forecast the beginning and end of a recession (or market top and bottom) is virtually impossible to do consistently.
Thanks to modern technology, we can identify hurricanes as they develop, track where they are likely to travel, and predict when the storm will make landfall. Modern media outlets and emergency alert systems are then able to get the information out to literally save lives.
Many have been saying that we’ve been in the 7th or 8th inning of this economic expansion. Economists were calling for a recession as early as 2011 during the European Sovereign Debt Crisis. Seven years later, we’ve still not had a recession. Stepping back and observing that no one has been able to successfully predict the timing of recessions is a freeing exercise.
Require Immediate Action:
When a hurricane is coming toward you, action is absolutely and imminently required. You may consider boarding up windows or placing sandbags near entry ways of your home. You may want to evacuate the area entirely to avoid getting caught in the storm. Just standing there could be life threatening.
This begs the obvious question, if we knew a recession was coming, what should we do to our portfolio? Jack Bogle, founder of Vanguard and Father of Index Fund Investing, had a famous saying, “Don’t just do something, stand there!” I love this quote (for investing not hurricanes!).
Often when disaster strikes, we feel the need to do something to our investment portfolio, but investors are historically terrible at timing the markets. What inevitably happens is we sell when we should be buying and buy when we should be selling.
A better plan would be to have a plan. If you live along the east coast you better have a hurricane plan, and if you are investing, you should have a plan for what to do in a recession. The key is to prepare in advance! Can your home withstand a hurricane? Can your portfolio withstand a Recession?
Cause Permanent Devastation:
No two hurricanes are the same, and the amount of damage caused can vary wildly. Conversely, a recession is a recession. In a recession the severity and length of the decline does not matter. I’ve never heard of a Category 1 or Category 5 recession. Maybe if it existed, a recession wouldn’t sound as scary. For most, when we hear recession we envision the Great Financial Crisis of 2008-2009 — the worst recession since The Great Depression. We’ve lived through 12 recessions in the 90 years since then, yet all we can remember is the most recent, and coincidentally, most severe. The simple fact is: most recessions come and go with very little fanfare.
I hope it is obvious at this point, but a recession is not a hurricane and should not be feared as such. No one wants to think about a recession when times are good but, without a doubt, the best strategy is to have a plan well ahead of time. Is your asset allocation appropriate? Are you comfortable with your equity exposure, or will you be tempted to sell and abort the plan? Do you have enough cash to live through a downturn? You can’t stop a Recession or a Hurricane from happening, but you should be prepared.