by: Richard A. Anderson
It’s often said there are two things that are guaranteed in life: death and taxes. While there have been many who have expanded this list to include other certainties life has to offer, one that often doesn’t make the list is recessions. As much as we hope and plead that economic expansions will last forever, we know the inevitable truth. The economy is cyclical. It goes through periods of expansion and contraction. Recessions happen as a result.
The U.S. economic expansion just turned 121 months old, which makes this the longest economic expansion in U.S. history. The current economic expansion has been slow and steady, which has contributed to its longevity.
I have written a number of times recently about the economy, both positive and negative, because there has been so much speculation about when this economic expansion will finally come to an end. After 10+ years, it’s not surprising to see dooms-day predictions that the apocalypse is just around the corner. The truth is that it’s much easier to identify where we are in the economic cycle after the fact.
However, there are myriad signs that we’re late in the economic cycle. History has shown, however, that late-cycle economies can continue to thrive for years.
I can’t tell you when the next recession will happen or what will cause it, but I can guarantee we will have another one in the future. Whenever it does happen, I’m equally confident in a few things.
1. An “expert” will have called it. A broken clock is right twice per day. If enough public figures predict when the next recession is going to occur, at least one is bound to be right at some point.
2. Blame will be cast. Someone (or something) has to be at fault for causing the recession, right? It could be the President for causing a trade war. It could be the Fed for raising rates too quickly or being too slow to cut rates. It could be Congress for failing to institute new rules and regulations on the capital markets. There will be a scapegoat.
3. Policymakers will be criticized. Policymakers should use every tool at their disposal to end the recession as quickly as possible. The attempts to steer the economy out of a recession, whether through fiscal or monetary policy, will be criticized. The most direct tool for policymakers is public spending (reducing taxes and increasing government spending). However, fiscal policy decisions are political and tend to be partisan.
4. It will be compared to past recessions. Millennials are on the verge of overtaking baby boomers as the largest adult population. This is a generation whose only memory of a recession is the Global Financial Crisis. This was a recession that saw stock prices decline by more than 50%, the unemployment rate double to 10%, and the financial system nearly collapse. None of that is normal and nothing before it could compare. Every recession is different. It has a different cause and a different cast of characters.
5. It will feel worse than it is. It’s been a long time since we had a recession. We have a tendency to expect the good times to keep rolling and forget the past, which makes the bad times feel even worse.
6. Your portfolio will decline. Stocks and other risky assets fall in price during recessions. It has happened in every past recession and it will happen during the next one. These asset price declines are the reason we as investors are rewarded for investing in the capital markets.
7. Opportunities will present themselves. Every recession has been a buying opportunity for long-term investors. When assets are cheap, that is the best time to buy. But there are other opportunities as well. Interest rates tend to fall during recessions, which means you can borrow at lower rates. There will be career opportunities as well. Some of the greatest ideas and companies were born out of needs uncovered during the Tech Bubble and Global Financial Crisis.
I think we can all agree a future recession will happen, even though we may disagree on the timing. No one can predict the future, myself included, but I think it’s fair to say 10+ years into an economic expansion we are closer to the next recession than the last recession. I hope I’m wrong and this economic expansion continues for many more years. Look no further than Australia, which hasn’t had a recession in 28 years. But that seems unlikely.
Since we can’t avoid them, we should prepare for them. I hope these points listed above will serve to put the next recession in perspective now, so that you can be a better investor when the inevitable does occur.