Recession warning signs and how to plan ahead
Recessions happen.
“A recession is always pending and will certainly happen again at some point,” says Wes Moss, the host of the Money Matters investment and personal finance radio show and Chief Investment Strategist and partner at Capital Investment Advisors in Atlanta, Ga. “It’s not likely in 2019,” he adds.
Dr. Jeffrey Rosensweig, an international economist and professor of finance at Emory University’s Goizueta Business School, agrees. “I don’t think a recession is imminent. It is true that if we go another year, it’ll be the longest period without a recession in our history,” he says. “But some recent studies show that the length of time we’ve been in a growth period doesn’t really affect the probability that we’ll fall into a recession in the next year. It all depends on the conditions at the moment.”
The truth is, no one has a crystal ball, but smart financial practices will serve you well no matter what the economy does. Here are some recession warning signs to watch for and ways to protect yourself and your finances.
Warning sign: Housing trends
Recession-watchers should pay attention to trends in the housing market since they can be a harbinger of what’s to come for the overall economy. “Sometimes if housing turns down, either there’s less housing sales or prices stop rising or even start falling, that’s a signal that the economy might fall into recession,” explains Dr . Jeff Rosensweig, an international economist and professor of finance at Emory University’s Goizueta Business School.
“It doesn’t happen all the time, but the tragic example was when housing boomed, and then it crashed in 2007. Then we fell into the Great Recession of 2008 and 2009.”
Warning sign: Stock signals
Monitoring the minutiae of the stock market can sound like a tall order if it’s not your trade, but Rosensweig suggests paying attention to macro trends. Many experts agree that market trends can be an indicator of where the overall economy is headed. “A number of times the stock market has turned down aggressively and then a while later, the economy turns down,” he says, adding that it’s not necessarily a cause-and-effect scenario.
“A possible reason is that investors and speculators really do a good job of looking at all the available data and forecasting the future. If they have a sense that things are going to get worse they sell stocks right away,” he explains. He’s not talking about a downturn of a percentage point here or there.
Keep an eye out for a sustained true bear market, with numbers down significantly. “Despite the scary news we’ve had in the stock market, and some very strong falls in stocks, we’re nowhere near what’s called bear territory, where the overall market has fallen 20 percent,” he says.
Warning sign: Read the index
This may sound complicated but stay with us. The Conference Board’s Leading Economic Index (LEI) has ten components that include claims for unemployment insurance, employment data, housing permits and stock prices (among others).
They compile them and create an index that helps give a snapshot of how the economy is trending. Right before the recessions of 2001 and 2007, the LEI got close to zero. As of 2018, we are in near highs since the last recession, and right now we’re seeing growth of about 7 percent, well into the “safety zone.”
Be prepared: Clear debt while times are good
Good financial hygiene—no matter the economic climate—is key to being prepared for whatever life throws your way. It’s important to pay down debt while the economy is doing well and save for the future. Moss says, “Once a recession hits, those with less outstanding debt, will more easily be able to attain loans to buy assets (at depressed prices) in the recession.”
Beyond being able to capitalize on reduced investment prices, knowing that you don’t have debt including student loans, consumer and credit card debt and multiple mortgages hanging over your head can help give you peace of mind, regardless of the markets.
Be prepared: Cash is key
Part two of Moss’ recession prep plan is building cash reserves, so you have funds readily available if you want to make purchases at bargain prices. “Banks will require higher down payments as lending restrictions tighten during recessions. So it’s important to have cash reserves to put toward loan down payments or outright purchases that look attractive as asset prices fall during a recession,” he explains, adding that during the last recession of 2007 – 2009, some real estate markets saw prices drop anywhere from 20 – 70 percent. In a recession, stocks will also “go on sale,” presenting an opportunity to gather shares at lower prices.
Be prepared: Investment strategies shift during recessions
According to Moss, “If you are under the age of 50, or more than five years from retirement, a recession can be an ‘opportunity’ to accumulate assets (stocks, bonds, real estate) at lower prices that should re-inflate during economic recovery.”
If your retirement date is imminent, it may make sense to become more conservative in your asset mix, favoring less volatile areas such as bonds, over more volatile assets (stocks). More conservative assets such as quality bonds tend to hold or increase in value during recessions.
Be prepared: Diversify your investments
Regardless of your financial situation and whether you’re traditionally employed or self-employed, diversification in your investments is key. “In the long run, people that have some shares of their wealth in the stock market have done much better than people who panic and get completely out,” Rosensweig says.
“People should not have all their eggs in one basket anytime, and have an intelligent kind of distribution, maybe some real estate, some stock, some money in the bank, maybe some fixed income, and then pretty much leave that distribution alone.” The point is not to panic.
Learn more:
- 4 ways to prepare your finances for the next recession
- Is a recession on the horizon? See what top economists say
- Should fear of the next recession keep you from buying a home?
- Another recession is inevitable. Here’s what this savvy investor learned from the last one
