I have a confession: I’m rooting for a recession -- and a bear market. Of course I don’t want people to suffer, but the longer both the expansion and bull market continue, the more we tend to forget that they can actually end, leading some to make poor financial decisions.
Let’s review some of the statistics. US stocks are now in the second longest bull market on record (the longest was 1982-2000) and the S&P 500 has nearly quadrupled since bottoming on March 9, 2009. The definition of a bear market is when the index closes at least 20 percent down from its previous high close. There have been six bear markets for the S&P 500 over the past fifty years, according Yardeni Research, and they occur about every three and a half years on average. So in terms of time, we are overdue.
Meanwhile, the US economic expansion is about to celebrate a milestone. May 2018 will mark the 107th month of the current growth cycle, which makes it the second longest in history, passing the 1960s Boom (1961-1969) that lasted 106 months. The technology miracle of 1991-2001 that totaled 120 months remains the longest on record.
It feels like we are owed a long run, especially after the painful impact of the Great Recession, which began in December 2007 and lasted until June 2009. At 18 months, it was the longest of any recession since World War II, according to the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) and it is widely considered the worst contraction since the Great Depression.
The good news is that recessions don’t last forever – on average about a year. Still, while conditions remain positive, it’s time for a refresher on what causes recessions. Since World War II, there have been three main culprits: (1) an external “shock” to the economy, such as the early 1970’s OPEC oil embargo or the first Gulf War; (2) the bursting of an asset bubble (think 2000 dot-com stock bust or the bursting of the housing and credit bubbles in 2008; or (3) an overheating economy that results in higher prices, which in turn prompts the Fed to raise interest rates. (Most economists believe that the next recession will likely be caused by #3.)
Just because the current expansion and bull market have both been going on for nine years does not mean that everything will come crashing down imminently. But we need to manage our financial lives knowing that both a recession and a bear market WILL OCCUR, regardless of the exact timing.
And while these relatively good times feel good, they can also breed complacency and that’s the main reason why I am rooting against them. To fight that natural tendency of forgetting that bad times can occur, here’s a reminder of what you can do right now. And yes, I know that I am a broken record on these recommendations, but they really do work!
1. Revisit/Create your financial plan. As flight attendants remind us, “items may have shifted during flight.” So too with your financial plan—hopefully for the better, but regardless, right after tax season is a good time to update the game plan.
2. Maintain a healthy emergency reserve fund. For those still working, maintain 6 to 12 months of expenses (12 to 24 months for retirees) in a safe, liquid account.
3. Pay down that debt! There’s nothing like a recession and bear market to expose the dangers of carrying too much debt.
4. Maintain a diversified portfolio...and don’t forget to rebalance.