By Matthew Gaude & Shawn McGuire
It’s coming. At least that’s what the headlines keep telling us about the next recession. We’ve been fortunate enough to experience the longest expansion in U.S. history, which makes people a bit jumpy about corrections and increased volatility. But market fluctuations are a normal and expected part of the economic cycle, and it’s no surprise that things are starting to slow down. The question is, how much will the economy slow down? Enough to be considered a recession?
In comparison to 2009, when the world was seemingly on the precipice of falling apart, right now things are pretty good in terms of the markets and economy. But because the Great Financial Crisis of 2007-2009 was so severe, since the day it ended, investors have been worried about the next recession.
First, there were double-dip recession fears. Next, it was the sovereign debt crisis in Europe. A soft landing in China has been a worry for years now. Then it was the surprise presidential election results in 2016. Now the big worry is an inverted yield curve. There will always be something to worry about, because good news is gradual, while bad news is a headline.
A recession is defined as two consecutive quarters of negative growth. (1) The following chart displays quarterly GDP growth from January 1, 2010, through June 30, 2019. The most recent quarterly GDP reading was 2.0% growth. First-quarter growth was 3.1%, and based upon the most recent economic data, 3rd-quarter U.S. GDP is forecasted to grow at approximately 2.0% according to the Federal Reserve Bank of Atlanta GDPNow economic indicator.
The average recession since 1945 has lasted nearly 11 months, with a median GDP decline of 2.4%. Through the end of July 2019, the United States has been in a recession 130 out of 895 months in total. This means the economy has been in a recession roughly 15% of the time over the past 75 years or so.
Looking at this another way, 85% of the time, the economy is in a state of expansion. The problem for investors is that most of us spend 85% of our time focusing on events that happen 15% of the time instead of the other way around.
It’s understandable that recessions are worrisome. Many of the all-time worst bear markets have coincided with a nasty recession. But a recessionary posture can’t be your default or there will rarely be any gains to hedge in the first place.
As you can see on the chart below, we have not had two consecutive quarters of negative growth since the great recession of 2008-2009. However, we have had several quarters where growth was negative followed by a sharp reversal in U.S. growth.
One major factor that can contribute to a recession is consumer spending. The chart below shows consumers are still very strong spenders; July consumer spending was +.6% above June. In addition, personal consumption saw the largest quarterly increase since 2014.
At this time, it does not appear that consumers are spending less, however, the last four months of the year will tell if the additional tariffs will contribute to a slowdown in spending.
Bear Markets During A Recession
Lesser market declines (of 10% to 20%) are simply called corrections and are still considered a part of a bull market. Though there’s no way of knowing what the next bear market will bring, we can look at what has happened in the past.
Since 1950, there have been 10 bear markets, though there have been 26 additional corrections. Of those bear markets, the shortest one lasted only 87 days in 1990 and the longest went on for 929 days from 2000 to 2002. On average, the bear markets lasted 394.2 days, or about 13 months. (2)
The average market loss during those 10 bear markets since 1950 was 34%. If that sounds low compared to your memory, it’s because the two greatest losses of 49% and 57% were the most recent ones, from 2000 to 2002 and 2007 to 2009, respectively. It’s understandable if those numbers cause immediate anxiety; no one wants to see those kinds of losses in their portfolios, especially if you’re close to retiring. So let’s take an objective look at our economy and break down the likelihood that we’ll see a recession soon.
What’s Going Wrong?
Our economy has been flying high for a while, with consistent GDP growth and record low unemployment numbers, but some things are starting to stir up trouble for our economy, which has people worrying that things have just been too good to be true.
The dramatic ongoing trade war with China seems to be holding our economy hostage. When new tariffs are announced, the markets pull back. When there’s a positive turn of events, they go back up. Our markets don’t like unpredictability, but that’s exactly what trade tensions are causing. We still don’t know how or if this international issue will be resolved or what extremes it will go to first, so it’s likely the markets will continue to react.
The Fed has been gradually increasing interest rates over the past two years due to strong economic growth. Their most recent announcement, though, was a lowering of the interest rate. This action should help the economy, making it more beneficial for people to borrow money, but it can also be seen as a red flag. The Fed sees recent global events and trade issues as threats to our economy and lowered the rates to be proactive.
What’s Going Up And Down?
Manufacturing output is down, likely influenced by the effects of the trade war. Other areas of the country are also suffering, such as farming, with farm bankruptcies up 13%, (3) and business growth is slowing down as well.
But the one thing that keeps going up is something we don’t want to increase; the U.S. annual budget deficit is over $1 trillion and expected to rise. (4)
Treasury Yield Curve
This is the factor that most causes people to ring the recession alarm. When it comes to bonds, long-term bonds generally pay out more than short-term bonds. But recently, the yield, or return, on the 10-year U.S. Treasury note fell below that of the two-year one. If we look at history, we see that a recession has followed this type of inverted yield curve.
But, unlike in the past, this yield curve only lasted one day and is now normalized. So while this isn’t good news for the economy, it does not guarantee that a recession is imminent. A lot depends on whether this happens again, and to what extreme.
What’s Going Right?
First and most importantly, the economy continues to grow despite the headwinds from Europe, tariffs, and slowing manufacturing in the U.S. Yes, tariffs are damaging. It is commonly mentioned that a 10% taiff on $300 billion in imports from China would cost consumers $30 billion. We are already starting to see manufacturing being moved from China to other countries such as Vietnam and Thailand. It is also largely unmentioned that the decline in the price of oil has reduced gasoline prices by approximately 30 cents, reducing household costs by roughly $43 billion, more than offsetting the prospective loss in buying power from tariffs. (5)
It’s clear that the economy is slowing down from the rapid growth we’ve seen in the past couple of years, but a cooldown isn’t the same as a freeze. There’s still a lot going right, enough to possibly keep us out of a recession.
Some Numbers To Note
If we look at some baseline numbers, we see that the economy isn’t hurting quite yet. Unemployment numbers are at record lows, (6) jobs are plentiful, wages are up, inflation isn’t going wild, and the GDP is still growing, (7) albeit slowly. This slow growth can be seen as a good thing, because if there are no booms, a bust is less likely.
This is a big one. Even though the headlines are shouting about the impending recession, consumers, who drive a significant portion of our economy, are still showing optimism. It’s estimated that our personal spending makes up 68% of economic activity, and if we’re still spending a lot, it’s because we aren’t too worried about losing our hard-earned money in a recession. (8)
The National Bureau of Economic Research is responsible for determining recession dates in our country, and they do this by analyzing four metrics: personal income, employment, industrial production, and real retail sales. (9) Even if all four areas are not currently skyrocketing, they are still holding strong.
So, while things are looking up, the direction the trade war goes could change things on a dime. For example, if the newly announced tariffs lead to higher prices on consumer goods, people may hold their wallets a little tighter.
Where Are We Going?
Whether we like it or not, things are starting to change. We’ve been fortunate enough to have a record-long period of growth, and the recent slowdown could be just that…or it could be a signal of things to come.
Regardless of what happens next, do your part to not be caught off guard. The best thing you can do is prepare yourself for a bumpy ride and commit to staying invested for the long haul. And the sooner you prepare, the better. It’s also a good idea to review your portfolio to make sure it is properly diversified and represents a risk level you are comfortable with. If you have questions about your portfolio or would like a complimentary review, our team at Live Oak Wealth Management would love to help! Call our office at 770-552-5968 or email [email protected]. Or, if you prefer, you can simply click here to schedule an appointment online.
Matthew Gaude is an *investment advisor representative and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and
investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. Working first as a commodity broker and then as a Business Development Manager for a national broker-dealer in previous jobs, he has the insights and experience to help clients understand the complexities of the market and implement strategies to minimize risk. To learn more about Matthew, connect with him on LinkedIn or visit www.liveoakwm.com.
Shawn McGuire is a financial advisor and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. He has worked in financial services since 2002 in positions ranging from financial advisor to stock broker and portfolio manager. As a CERTIFIED FINANCIAL PLANNER™ professional, he is trained to help clients with virtually all their financial needs. To learn more about Shawn, connect with him on LinkedIn or visit www.liveoakwm.com.
Securities offered through American Portfolios Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through *American Portfolio Advisors, Inc., a SEC Registered Investment Advisor. Live Oak Wealth Management, LLC is independently owned and not affiliated with APFS or APA.
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