Hurricane Harvey blasted Texas and left a trail of debris in its wake. The refineries couldn’t produce gasoline, and, as a result, Texans faced a gas crisis. As pumps ran dry, people panicked and emptied grocery stores and ATM’s. It was a few days of bedlam.
Barron’s Magazine this week ran several stories about preparing for the worst. One article had the ominous headline: “9 Meals Away from Disaster.” In the article, it quoted British MI5 as saying: “At any given time, we’re nine meals away from anarchy.” Nine meals equate to three days’ worth of food. If Texans panicked over a lack of gas, can you imagine the reaction people would have if they couldn’t feed their families?
Since the Dow Jones peaked July 23rd, it has fallen 6.25% as investors react to recession fears. The Twitter Trade war escalated this past Friday, sending the Dow down by 623 points, or 2.4%. Also, interest rates are inverting, a semi-valuable predictor of recessions. Currently, the 1-month Treasury rate is 2.07% while the yield on the 30-year is 2.02%. You earn more interest in 30 days than you do for 30 years.
What exactly is a recession? Here’s a definition from Investopedia: “A recession is a macroeconomic term that refers to a significant decline in general economic activity in a designated region. It is typically recognized after two consecutive quarters of economic decline, as reflected by GDP in conjunction with monthly indicators like employment. Recessions are officially declared in the U.S. by a committee of experts at the National Bureau of Economic Research (NBER), who determines the peak and subsequent trough of the business cycle which demonstrates the recession.”
A recession is identified by a “committee of experts” after they determine the “peak” and “trough” of the business cycle. In other words, we won’t know we’re in a recession until it’s almost over.
If GDP (Gross Domestic Product) is the barometer, how’s it doing? Currently, real GDP growth is 2.1%. Since 1947 it has averaged 3.2%. During the Great Recession (2007 – 2009) GDP growth bottomed in the fourth quarter of 2008 when it fell 8.4%. In 1954 GDP growth fell 10%.
Since March 1989, GDP has averaged 2.5%. During the past three decades, we’ve had 110 quarters with positive growth and 12 negative ones. We’ve had three recessions: 1989, 2001 and 2008, or about once in every ten years. Below is a chart of the GDP growth with a recession overlay.
How did the market perform over the past 30 years? Since August 1989 it has risen 966.7%. The Dow Jones closed at 2,402.68 on August 24, 1989. It closed at 25,628.90 yesterday. During the Great Recession, the market started to rebound in March 2009, six months before GDP growth turned positive and the recession was declared over.
What should you do if we’re on the edge of another recession? Here are a few suggestions.
- Buy Gold. From 2007 to 2010 gold (GLD) appreciated 120%. Since 2011 it’s down 5.15%. The precious metal performs well during times of fear, chaos, and duress.
- Buy Bonds. Long-term bonds soared 28% in 2008. During the Great Recession, they were up 6.4%.
- Buy Small Caps (Maybe). During the last recession, small-cap stocks rose 3.84%, primarily due to their lack of financial leverage.
- Raise Cash. Money market funds, savings accounts, or T-Bills will allow you to pay your bills and preserve your assets. How much? According to Mark Zandi, Chief Economist at Moody’s Analytics, recessions last about ten months. So, if you’re concerned about a prolonged recession, then keep two to three years’ worth of household expenses in cash or short-term investments.
- Store Cash. Keep a few thousand dollars in your household safe in the unlikely event you can’t access your bank or ATM.
- Buy Stocks. The best time to buy stocks is when everybody else is selling. Wealth creation starts during bear markets. When fear is high, values are low. It takes courage to buy when others are selling. Sir John Templeton bought 100 shares of every stock on the New York Stock Exchange trading below $1 during the Great Depression. His two investment themes were “avoid the herd” and “buy when there’s blood in the streets.” He died in 2008 with a net worth of $13 billion.
- Doing nothing is a prudent strategy. A balanced portfolio of large, small, and international stocks and bonds produced an average annual return of 7.42% from January 2007 to July 2019. Investing monthly, through the recession, improved your performance to 8.4% per year. If you bought the portfolio on January 1, 2007, and sold on December 31, 2010, you would have made 3.13% – not significant, but positive. A buy and hold investor survived the Great Recession by doing nothing.
- Reduce Debt. The last ten years have treated investors well, and you may have substantial capital gains. If so, take your profits and pay off your debt. Reducing your debt level will allow you to survive a recession if your cash flow drops.
- A recession impacts human capital. If you’re fortunate enough to have financial assets, use them to help others during a time of crisis. Your gift may allow another family to recover from the pit of despair.
Recessions are frightening to be sure. However, no one can predict when, where, or how they’ll arrive. It’s impossible to forecast what factor will take down our economy, and no two recessions are alike. You will die a thousand deaths worrying about an economic collapse, especially if you’re watching the evening news or reading social media sites.
Jesus said it best in Matthew 6:25-34: “Therefore I tell you, do not worry about your life, what you will eat or drink; or about your body, what you will wear. Is not life more than food, and the body more than clothes? Look at the birds of the air; they do not sow or reap or store away in barns, and yet your heavenly Father feeds them. Are you not much more valuable than they? Can any one of you by worrying add a single hour to your life? “And why do you worry about clothes? See how the flowers of the field grow. They do not labor or spin. Yet I tell you that not even Solomon in all his splendor was dressed like one of these. If that is how God clothes the grass of the field, which is here today and tomorrow is thrown into the fire, will he not much more clothe you—you of little faith? So do not worry, saying, ‘What shall we eat?’ or ‘What shall we drink?’ or ‘What shall we wear?’ For the pagans run after all these things, and your heavenly Father knows that you need them. But seek first his kingdom and his righteousness, and all these things will be given to you as well. Therefore, do not worry about tomorrow, for tomorrow will worry about itself. Each day has enough trouble of its own.
I been to the edge, an’ there I stood an’ looked down. ~ Van Halen, Ain’t Talkin’ ‘Bout Love
August 24, 2019
Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level.
Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.
 9 Meals Away from Disaster. Financial Advisors on How to Prepare for the Worst. Mike Zimmerman, August 23, 2019
 Investopedia, Recession definition, reviewed by Jim Chappelow, Updated May 6, 2019
 YCharts US Real GDP Growth
 https://www.usatoday.com/story/money/2019/08/19/recession-what-does-mean-and-what-like/2030642001/, Janna Herron, August 19, 2019
 https://en.wikipedia.org/wiki/John_Templeton, website accessed August 24, 2019
 Morningstar Hypothetical. Equal weighted portfolio rebalanced annually: IVV, EFA, IJR, TLT.