It’s a bit difficult to listen to the radio, turn on the TV, or pick up a newspaper without noticing how news rooms latch on to a piece of recent economic data like a “jobs” report and confidently predict future events, like the next recession. Talk of a recession amounts to about 2/3rds of all the discussions I’ve had with folks over the last 3 months, so I thought I’d throw in my 5 cents worth.
I’m not saying that the economists and speculators are wrong, but anyone who has been watching economic indicators as long as I have will have noticed a few things about them. First though, here are the ones I think are worth keeping an eye on.
Gross Domestic Product - The market value of all the goods and services produced by a nation during a specific time period.
Money Supply - All the money that’s in circulation during a specific time period.
Consumer Price Index - Movements in the cost of stuff we all buy.
Producer Price Index - Movements in the prices paid by the producers of the stuff we buy.
Consumer Confidence Index - A gauge of how we all feel about the health of our national economy.
Current Employment Statistics - A measure of how many new jobs are created and how it affects unemployment rates.
Retail Trade Sales - How much we are all spending on stuff like hamburgers and refrigerators.
New Housing Starts - The rate at which new building permits are issued.
Manufacturing Trade Inventories - The trade, sale, and shipment of goods.
The S&P 500 Stock Index - Stock market performance.
All of these indicators are interdependent. One can and will affect and influence another. All of them get observed and reported on an hourly/daily/weekly/monthly basis. They are subject to seasonal fluctuations and then revised up or down some time afterwards, because the government collects most of this data… and occasionally, it makes a mistake.
Economic indicators are both useful and unreliable at the same time. They are, as an old friend of mine used to say, “...a relatively accurate predictor of something that’s already happened.”
The very definition of a recession is two consecutive quarters of negative growth in the Gross Domestic Product. That means economists can really only confirm a recession after we’ve been in one for 6 months. And then of course, we have to wait a few months for any revision of the data. This makes a recession notoriously difficult to predict.
At the time of writing, the S&P 500 Stock Index is 2,981.49. On September 7th 2018—just about one year ago—the index was 2,871.68. We have certainly had a lot of excitement over the last 12 months and lots of “newsworthy headlines,” but not much growth. This is normal. Stock markets do this from time to time.
It’s clear, however, that the pace of economic expansion we have experienced through the last 10 years is slowing. Not crashing, not reversing, but definitely slowing down. This, again, is normal in the economic cycle.
Currently, the U.S. is engaged in a “trade war” with China. The U.K., after 40 years of economic integration within the EEC is finding that getting out is a bit trickier than they anticipated. These two issues alone involve 60% of the entire global GDP, (U.S $20T, EEC $18T, China $15T) and thus, until they are resolved, will continue to fuel uncertainty and a good bit of “noise” from our friends in the news rooms.
So here are the statistics:
Since 1980, the U.S has experienced 4 recessions. On average, we get one every 9.5 years, they last on average about 12 months, and have an average negative effect on the economy of around -2%; unemployment increases, and there’s normally a downward revaluation of stock values. Past recessions all started for different reasons and they all impacted the economy differently. The most recent recessionary event was in 2008. That’s the one that is embedded in most of our memories. Anyone with all of their investments in stocks would have suffered around a 35% loss in value through a remarkably short period of time. It would take about 6 years for the stock market to recover the lost ground.
Prudent financial planning understands that investment values can be volatile: there will be good times and difficult times through the economic cycles. Asset allocation is the key. Monitoring our exposure to stocks must be commensurate with our individual appetite for and understanding of risk and our long term aspirations and goals. Like most things in life it’s a compromise.
Our job as an advisory firm is not to predict the next storm: it’s to make sure your boat doesn’t sink when one comes along.
Any time is always a good time to review your financial plan.
If you have concerns and/or questions about your plan, call us: 513.834.9383