The Recession Question
As you probably know, I’m on the receiving end of a lot of questions about the economy. People are anxious. The headlines aren’t good. This probably won’t surprise you, but the #1 question asked by volume is, “Will there be a recession?” For this month’s blog, I’m going to share an actual response I sent to a client last week regarding the recession question.
Since most of my time is spent talking to people in person, (and not necessarily writing my answers down in detail) I thought this would be a great opportunity to push out my thoughts to all of you struggling with the same questions.Before I launch into it, I’d like to point out that this particular client had emailed me a 116-page slide deck prepped by another financial professional, and they were asking whether or not I agreed.
The slide deck isn’t important for the purposes of this response, but I’m telling you this because my response is a little more technical than the way I usually write in this newsletter. Even so, many of you might find it helpful to get a peek inside my brain as I try to navigate the same issues you’re navigating.One final note: I list several actions to take, but they are not intended to be individualized investment advice.
Will There Be a Recession?As I'm thinking through the short-term, I keep coming back to the U.S. consumer. If U.S. GDP is something like 70% consumer-driven, and consumers have jobs, then I think that recession in the U.S. is unlikely without some sort of shock. If it does happen, it's probably mild. If there's a run-of-the-mill recession, where GDP goes negative for a few quarters and some people lose their jobs and assets are repriced accordingly (to the downside), it will not be the end of the world and prices will eventually recover. When you zoom way out, risky assets will be repriced constantly from now until the day you sell them, so if you assume that you'll hold stocks in your portfolio for 30-50 years, the next downturn is just a blip on the radar. One positive sign in the stock market is that mini-bubbles keep popping (crypto in 2018, pot stocks in early 2019, unicorn IPOs in 2019), without doing damage to everyday people. If little bubbles release some of the pressure without totally wiping out consumers, then big bubbles will have a hard time forming. The last two recessions were accompanied by 1) a stock bubble and 2) a real estate bubble, both of which were very much tied to the normal, everyday consumer. I can't find an example of a scary bubble today, and everyone and their mother is looking for one.
My hunch is that negative interest rates in Europe and Japan are here to stay. Their populations are aging, and it's sucking the life out of their economies. Unless they figure out a way to increase productivity and grow GDP using that lever, then it's probably a slow-mo train wreck. I'd avoid the debt and equity markets in those areas. Relative to Japan & Europe, the U.S. is demographically stable over the long run, though the next 10 years will be a challenge as Baby Boomers hit peak retirement years. If they are getting more conservative and rolling into bonds, that will put upward pressure on prices and downward pressure on yields even in the face of growing issuance by the Treasury to fund deficits. The cost to re-route all the supply chains is not a terribly productive use of capital in the short-term, but eventually it will be done and then it's done. All sorts of political stuff is probably going to happen. So the next 10 years will probably be tougher than the last 10.All that said, general advice for individuals trying to weather the uncertainty is:
U.S. stocks for the long run. Add to them every year, but put them in a time capsule and come back in 30 years. Don't think about them in the meantime.
U.S. bonds are probably fine in the short-term. You can stay in short maturities and on the high quality end of the spectrum if you're worried about defaults (which tend to spike during recessions).
Rental real estate in ATX is good if you can get a property to cash flow in the short term.
Make sure you have enough liquidity to fund personal/business expenses for 1-3 years if something very bad happens. Sources include cash/money markets, high quality bond funds, etc. Also, get a HELOC against your home and line up as many business LOCs as you can. Better to buy umbrellas before it starts raining.
I hope this has been helpful, and as always, please call or email me if you’d like to meet about your own unique circumstances.