For the last few years, a recession has “been coming.” Whether it will come tomorrow or five years from now, many metrics have analysts convinced that a recession is on the way — and you need to start preparing now.
Recessions can sound terrifying from a business perspective, but like most things they come with as many opportunities as they do challenges. Here are a few ways you can prepare yourself and your investments from a recession.
Analysts Believe a Recession is Coming
The United States has been preparing for the next recession since late 2017, with many analysts seeing indicators that it’s going to start within the next couple of years. Until recently, the stock market has been steadily rising. The last recession ended in June of 2009 — as of August 2018 everything has remained positive, if a little sluggish. Yet analysts point out that the housing inventory has increased, stock prices have spiked, and the yield curve is flattening. These are all potential signs of recession.
There’s no one way to identify a recession. Rather, analysts look at factors that many recessions had in common. But recessions can also be triggered by things such as trade wars and high unemployment rates. Recessions are also as psychological as they are mechanical: if the public believes a recession is occurring, the public can exacerbate the problem.
Preparing for the Next Recession
You can protect yourself during a recession, but you have to take proactive measures. Once the recession has already occurred, it may be too late to make the necessary changes.
Save as much money as possible. Liquid cash is king when it comes to a recession. Your investments will be down, but there will be many opportunities to purchase into companies that have excellent fundamentals but may be temporarily reduced in value. If you own a business, you need to be shoring up your reserves; these will get you through difficult times and, ultimately, make you more competitive.
Eliminate your debt. Having less debt on your balance sheet means increased agility for you. Being in debt and over-leveraged is what tends to destroy both businesses and individuals during a recession, as you may experience decreased earning potential.
Recession proof your portfolio. During times of recession, stocks become more affordable; therefore, those who currently have liquid funds will have more buying power. Further, the recession tends to impact specific markets more than others. Oil and gas companies — which rely upon a strong economy — are often the hardest hit. Recession-proofing your portfolio often means investing in things such as real estate and gold — commodities that are always going to have some inherent value. And though the value of these commodities may go down somewhat during a recession, they will also often bounce back faster following it.
In short, keep yourself as agile as possible when you suspect that there may be difficult periods to weather ahead.
Of Course, Not Everyone is in Agreement
Not everyone believes that a recession is on the immediate horizon. In an interview with Forbes, Sierra Investment Management’s Terri Spath outlined four indicators that a recession isn’t about to occur:
Leading economic indicators: Economic indicators generally turn negative just before a crash.
Housing indicators. Housing prices usually peak and then begin to fall before a crash.
Consumer confidence: Consumer confidence tends to sharply fall before a rash.
Flattening or inversion of the yield curve: The yield curve tends to flatten just before a recession.
You may note that many of these indicators are exactly what other analysts have pointed to when saying there will be a recession. As an example, the yield curve has not flattened yet, which some analysts take positively — while other analysts say the curve appears to be flattening now.
No one can predict a recession with absolute confidence, as it is caused by a myriad of factors. Not only does the economy need to do poorly, but there needs to be a loss in consumer confidence which sharply reduces investing and spending. That being said, most analysts do believe that a recession is coming, and it’s best for investors to begin preparing for it now.
Regards,
Ethan Warrick
Editor
Wealth Authority
