2010-2019: The Decade in Review

Every January, we send our clients a letter titled The Year in Review, where together we look back at the year that was. What were the highlights? What were the “lowlights”? What did we learn?

But this January doesn’t just mark a new year. It marks the beginning of a new decade. (Unless you are a strict observer of the Gregorian calendar system, in which case the next decade begins in 2021. But we digress.) So, for this letter, we’re going to look back at what shaped the markets in the 2010s – and what lessons we should take with us into the ‘20s.

2010-11: Aftershocks of the Great Recession

The best way to see how much can change in a decade is to remember how things were at the end of the last one. In 2010, we were coming off the worst decade for stocks since the 1930s. The Great Recession had devastated the retirement savings of millions of people. Many of the world’s most famous financial institutions had collapsed. And the national unemployment rate was near 10%.¹

It was a scary and uncertain time. Many investors had fled the markets entirely by 2010, some for good. As a result, they missed a remarkable recovery that was just around the corner. Not only that, they missed the longest bull market in history.

In hindsight, it might seem obvious that there was nowhere to go but up. But just as the start of a recession is very hard to see coming, the ending can be equally hard to wait for. People can be forgiven for thinking the worst was still to come, because in 2010 and 2011, there were still a lot of ominous headlines to deal with. Remember any of these terms?

Sequestration ● U.S. Debt Ceiling ● European Debt Crisis
● Bailouts ● Austerity ● The Fiscal Cliff

For the first few years, fear abounded as to whether the global economy would be able to recover at all. Nation after nation dealt with spiraling debt that couldn’t be paid off. Remember how often Greece used to be in the news? Some analysts speculated about the possibility of a second recession. 2011 was an especially tenuous year for the stock market, especially when the United States’ credit rating was downgraded for the first time in history.

2012-14: The Federal Reserve intervenes

 During this time, however, the world’s largest central banks were working behind the scenes to keep the recovery going. In the United States, for example, the Federal Reserve embarked upon a massive bond-buying program, to the tune of $85 billion per month. This accomplished two things. First, it flooded the money supply and kept interest rates historically low. Lower interest rates made borrowing less costly, which meant businesses and individuals could borrow and spend more, thereby pumping more money into the economy as a whole. This, of course, equaled growth. Slow growth, but growth nonetheless.

The second thing the Fed’s bond-buying did was drive more investors into stocks. Low interest rates often lead to lower returns for fixed income investments, so it was into the higher risk, higher reward stock market that investors went. All this had been going on for years, but the results were only then becoming apparent. So, it came almost as a surprise when the markets reached new highs, even though the economy still seemed to be licking its wounds. It was in mid-2013 that the Dow hit 15,000 for the first time, rising to 16,000 by the end of the year, and then 17,000 the year after.

2015-16: Waiting for the other shoe to fall

But that didn’t mean the markets were immune to volatility. Despite the economic recovery, many experts spent the decade in near-constant fear of another bear market. Every wobble, every market correction, was watched with fearful anticipation. It was like standing next to someone’s hospital bed, thinking every next breath will be their last. Some of this was probably a form of post-traumatic stress caused by the Great Recession. The rest came from the spasms of an ever-changing world.

Oil prices plunged dramatically around this time, hurting both oil-producing nations as well as the energy industry. China’s stock market crashed. The Greek debt crisis reared its ugly head again, prompting fears that “financial contagion” would spread and create another global recession. And then came Brexit. The news that the United Kingdom would leave the European Union sent shockwaves around the world. And here at home, one of the most bitterly contested presidential elections in U.S. history had both sides of the political aisle forecasting economic ruin if the other side won.

But despite the dire predictions, these developments only slowed the recovery’s march rather than derailing it completely. In fact, by July of 2016, the Dow once again hit new heights.

2017-19: The longest bull market

While most of the decade had seen slow-but-steady growth, the horse started picking up speed as it neared the finish line, buoyed by tax cuts, increased government spending, and corporate earnings. Nowhere was this truer than with the Dow. Comprised of thirty of the largest publicly-traded companies, the Dow hit 20,000 for the first time early in 2017 – and closed well above 28,000 on December 31, 2019.²

Exactly ten years before, the number was only 10,428. That’s an increase of over 170% – the culmination of the longest bull market in history.

Of course, it wasn’t all smooth sailing. The trade war with China is an ever-present concern, with rising tariffs often leading to brief, but dramatic downswings in the market. 2018 was actually a down year for the S&P 500, the only one of the decade. And as the 2010s drew to a close, many economists warned of a slowing economy – with maybe even a mild recession in store.

Despite these warnings, investors did what they had done for most of the decade: Act startled, and then head right back into the markets. Some pundits call it a market “melt-up” instead of the usual meltdown.

What have we learned?

So. A remarkable decade filled with twists and turns. But what did we learn?

When we looked back at the last ten years, one thing that struck us was how interconnected the world has become. So many of the storylines that drove the markets originated far beyond our shores. We truly live in a global economy. We invest in other countries, buy products in other countries, loan money to other countries (or apply for loans, as the case may be) and trade with other countries. We might be separated by the world’s biggest ponds, but the ripples near one shore are always felt near the other.

That means two things. One, for advisors like us, it means there’s more than ever to keep track of. But two, it means we should react less and less to the headlines of the day – or to each individual ripple. A butterfly might flap its wings in Beijing and cause a hurricane in Topeka, as the saying goes, but there are butterflies flapping their wings everywhere. That’s one reason why we saw many storms but fewer hurricanes in the 2010s.

Another thing we learned?  Sometimes, most times, slow and steady really does win the race. We were all taught the truth of this as children when we learned the story of the tortoise and the hare. The past decade proved it. Everyone loves growth that comes fast and hot. But when something burns fast and hot, it tends to burn out faster, too. One reason we never saw the recession so many people feared is because the economy recovered as slowly as it did. It’s a lesson we can apply to our own financial decisions. While it’s always tempting to chase after windfalls and jackpots, it’s so much smarter to prioritize steady progress over short-term whims. The race to your goals is a marathon, not a sprint.

A third thing we learned is how often things don’t go as predicted. In 2010 and 2011, many experts predicted a gloomy decade for the stock markets – and they had good reason to think so! But it didn’t happen. When, say, Obamacare became the law of the land, many experts predicted economic disaster. As of this writing, it hasn’t happened. When Brexit became a reality, many experts predicted a global catastrophe. As of this writing, it hasn’t happened. When President Trump was elected, many experts predicted a market meltdown. As of this writing, it hasn’t happened. We all have our opinions on whether events like these were good or bad, of course. But it’s a good thing we didn’t base our investment decisions on any expert’s predictions!

Because if there’s one thing we learned this decade, is that a prediction is like a person’s appendix – pretty much useless.

 2020 and beyond

With that in mind, we won’t make any predictions for the coming decade. If history is correct – and it always is – another market correction, another bear market, another recession will come eventually. Whether it’s this year, or next, or the one after that, we can’t say. What’s more important is that we remember this:  It’s when we fly that we should have the healthiest respect for gravity. But it’s when we’re on the ground that we should raise our eyes to the skies.

Investing is like trying to find our way in the dark – and our strategy is our North Star. It’s so much more valuable than any prediction! We may bump into the occasional obstacle. Sometimes, we may even trip. But if we hold to that star, we will keep moving forward in the direction we want to go.

We will make this decade whatever we want it to be.

Happy New Year!  Our team can’t wait to spend the next decade with you.

1 “State Unemployment rates in 2010,” U.S. Bureau of Labor Statistics, https://www.bls.gov/opub/ted/2011/ted_20110301.htm
2 “Stocks close out at highest end-of-year gains since 2013,” Chicago Sun Times, https://chicago.suntimes.com/business/2019/12/31/21045017/us-stock-market-year-end-close-out-2019

In December, Congress passed a new bill called the Setting Every Community Up for Retirement Enhancement Act, aka the SECURE Act. Besides proving that Congress can make an acronym out of almost anything, the bill – which goes into effect on January 1, 2020¹ – makes some important changes to various rules on saving for retirement. Many of these changes are positive, in the sense that they should make it easier for people to save more for longer. However, the SECURE Act also eliminates a popular estate planning tactic that many Americans have used to help their family after they pass away.

To help you understand the SECURE Act and how it may affect your finances, I’ve written this special letter. There’s a lot to unpack here, so please take a few minutes to read about these changes. Most are fairly simple, actually, but if you have any questions or concerns, please let me know. Remember that my team and I are always available to help provide financial clarity. In my opinion, that’s one of the most important things any person can have.

In the meantime, I wish you and yours a Happy New Year! I hope the year 2020 is a great one!

Important Provisions of the SECURE Act

Before we dive in, understand, that the SECURE Act is over 20,000 words long. (And in fact, the Senate had to tuck it away in a much, much larger appropriations bill to pass it.) That means there isn’t room to cover every provision of the new law, and many won’t apply to you anyway. So, what follows is a brief overview of the major changes that could affect your finances.

Are you ready? Then take a deep breath as we go over…

CHANGES TO THE IRA “STRETCH” PROVISIONS²
For years, one of the most popular estate planning strategies was the use of Stretch IRAs. When a parent or grandparent dies, they can leave their IRA to their children, grandchildren, or other heirs. Under the old rules, these beneficiaries could take distributions from their inherited IRA based on their official life expectancy. This allowed them to “stretch out” the value of the IRA – and the tax advantages that come with it – for a longer period. For example, if a 50-year old with a life expectancy of 85 inherited her mother’s IRA, she could stretch out her distributions over the next 35 years.

Now, non-spousal beneficiaries who inherit an IRA in 2020 or beyond can no longer do this. Instead, inherited IRAs fall under the new “10-Year Rule”. This means that all the money in the IRA must be withdrawn by the end of the 10th year following the year of inheritance. At that point, the beneficiary must pay taxes on that money.

Note that the rule does not require the beneficiary to take withdrawals during the 10-year period if he or she doesn’t want to. That’s important! Deciding when to take withdrawals should be based on several factors, including the beneficiary’s current financial situation, how close they are to retirement, and when they plan on taking Social Security benefits.

Something else to note: The new 10-Year Rule does not apply to spouses, disabled and chronically ill beneficiaries, and minors. For the last group, the exception lasts until the child reaches the “age of majority”, which is 18 to 21 depending on the state. Once they reach that age, the 10-Year Rule kicks in.

Make no mistake: This new rule will have a profound impact on beneficiaries, especially those who are younger and could otherwise have waited decades before making withdrawals (and paying taxes on those withdrawals). For this reason, if you are either planning to bequeath an IRA to your beneficiaries, or are expecting to inherit one yourself, consider scheduling a consultation with me about your options. I want to do everything I can to help you and your heirs maximize your retirement savings while minimizing your tax burden.

CHANGES TO REQUIRED MINIMUM DISTRIBUTIONS FOR IRAS²
Speaking of maximizing your retirement savings…
Another change the bill makes is to lengthen the time people can contribute to their IRAs. Currently, retirees can only contribute to an IRA up to age 70½. Once they hit this milestone, they are required to begin making withdrawals. (These are called required minimum distributions, or RMDs.) Under the SECURE Act, that age would increase to 72. That means retirees have an additional 18 months to benefit from the tax advantages that come with IRAs. 

Note: This change only applies to those who turn 70½ in 2020 or later. Even people who turned 70½ in December of 2019 would still have to take an RMD for 2020.

That’s it for this provision. See? I told you some of the changes were simple.

OTHER IRA CHANGES²
Here’s another simple change. Under the old rules, contributions to a traditional IRA were prohibited once a person reached the year they turned 70½. No longer. Now, anyone, even those older than 70½, can keep contributing to their IRA so long as they continue to work.

Here’s an example. Jane turns 70½ in 2020 but decides she wants to continue working. So rather than withdraw money from her IRA, she decides to make a tax-deductible contribution to it instead. While Jane must still take RMDs once she turns 72, she decides to keep making contributions every year until she actually retires, as the math still works in her favor.

Obviously, this change only benefits those who continue working into their seventies. And even then, it may not always make sense to keep contributing to your IRA. But it’s always nice to have options!

Another change is for new parents. Under current law, a person must be 59½ years old to make withdrawals from a traditional IRA. If they withdraw money earlier than that, they must pay a penalty of 10% on the amount you took out. There are a few exceptions, such as if they need the money to pay large medical bills, buy a home, or manage a disability. But, generally speaking, the government wants the money inside a retirement account to be saved for retirement.

Under the SECURE Act, new parents can now withdraw funds penalty-free to help cover birth and adoption expenses. This is especially helpful for younger parents who have high deductible insurance plans. There is a $5,000 cap on withdrawals, though, and they need to be made within one year of the birth or adoption.

CHANGES TO 401(k)s²
The SECURE Act brings many changes to 401(k)s, but most are for businesses to worry about. There is one change you should know about, though, and it involves annuities.

A type of insurance product, many annuities offer a monthly stream of income, sometimes for life. This can make them attractive for retirees. Historically, few 401(k)s contained annuities. The SECURE Act makes it easier for employers to offer this as an option.

The reason I mention this is because you should get a second opinion before putting your money in an annuity. Choosing the right annuity can be difficult, as there are many types and features, and some annuities come with high costs. So, while an annuity may be right for some people, that doesn’t necessarily mean it’s right for you.

If you have questions about this, let’s chat! I’d be happy to provide you with a second opinion.

CHANGES 529 PLANS²
For many Americans, paying off student loans is a difficult financial burden. To help pay for their loved ones’ higher education, some parents and grandparents use 529 plans. Any funds invested in a 529 plan can be used to help pay for college expenses, like room and board or tuition. The best part is that the funds are exempt from federal taxes, and often state taxes, too, so long as they’re used solely for education expenses.

Under the SECURE Act, parents with 529 plans can make a tax-free withdrawal of up to $10,000 to help pay off their child’s student loans. This $10,000 limit is per person, not per plan, which means another $10,000 can be withdrawn to help pay the student debt for each of a 529 plan beneficiary’s siblings.

If you have invested in a 529 plan for a child or grandchild with lots of student debt to pay off, let’s talk to see if it makes sense to take advantage of this.

CONCLUSION
As you can see, the SECURE Act is loaded with changes and provisions for those saving for retirement. So, again, if you have any questions or concerns, please don’t hesitate to contact me for a free consultation!

In the meantime, remember that I’m here to help you work toward your financial goals. Please let me know if there’s ever anything I can do – in 2020 and beyond.

Happy New Year!

Sources
1 Anne Tergesen, “Congress Passes Sweeping Overhaul of Retirement System,” The Wall Street Journal, December 19, 2019. https://www.wsj.com/articles/senate-spending-bill-includes-significant-changes-to-u-s-retirement-system-11576780736
2 Text of “SETTING EVERY COMMUNITY UP FOR RETIREMENT ENHANCEMENT” (page 1532), Senate Appropriations Committee, December 16, 2019. https://www.appropriations.senate.gov/imo/media/doc/H1865PLT_44.PDF

You’ve probably never asked your adult children and younger relatives whether they have security software on their computers and devices. Why would you? They’re digital natives, born with keyboards under their fingertips.

It may be time to ask.

In an unexpected twist, the best gift for some younger Americans this holiday season may be data protection software or services. A 2019 You.gov poll reported 35 percent of Americans, ages 18 to 34, think their data and personal information is ‘not very or not at all vulnerable’ to hackers.¹

Those feelings of invulnerability aren’t the result of scrupulous digital security strategies. One-third of younger Americans polled indicated they didn’t pay for or use free programs to protect computers and personal data (or they did not know if data protection was in place).¹

It’s remarkable the most digitally savvy among us aren’t the most concerned about data safety when a hacker attacks every 39 seconds, according to Security Magazine. Within just a few years, Cyber Security Ventures expects cybercrime to become “more profitable than the global trade of all major illegal drugs combined.”^{2, 3}

Curiously, older Americans – the same group that provides ample fuel for social media groups where younger generations entertain themselves by ‘talking like boomers’ – appear to take cyber threats more seriously than younger ones do.^{1, 4}

The You.gov poll found 80 percent of Americans over age 55 have digital security measures in place. If you’re not one of them, it’s time for you to protect yourself. Hackers and cybercriminals prefer easy marks, and you don’t want to be one.¹

Digital security basics
Protecting personal and financial data means forming good digital habits, as well as using reputable security software. Here are a few digital do’s and don’ts. (You may want to share them in the holiday card you send to younger relatives.)

• Do stay up-to-date. Periodically, you receive notices indicating your computer’s operating system or an application should be updated. When they arrive, take a few minutes to install the update. Out-of-date systems and software make you vulnerable to attacks.⁵
• Do think carefully about privacy. In an unwelcome development, some third-party apps may have been reading your email. A large mail provider gave the apps access, and the people using the mail service agreed to it in the privacy policy they may not have read. After The Wall Street Journal reported the practice, the U.S. Senate sent a letter to the mail provider asking it to reconsider its practices.⁶
• Don’t skimp on passwords. Sure, it’s easier to remember your password when it’s the same for everything. Using the same password also makes it easier for cybercriminals to access every account you have when a data breach occurs. Create a different password for every account and consider using an encrypted password manager to keep track of them.⁵

When it comes to passwords, the Federal Trade Commission recommends, “Be creative: think of a special phrase and use the first letter of each word as your password. Substitute numbers for some words or letters. For example, “I want to see the Pacific Ocean” could become “1W2CtPo.”⁷

• Do use multifactor authentication. Usernames and passwords don’t provide enough protection anymore. The National Institute for Standards and Technology recommends multifactor authentication (MFA). It offers an additional layer of security.⁸

For instance, imagine a hacker logs into your bank account using your username and password (possibly obtained from a data breach). If you have MFA, instead of providing immediate access to your account, the bank will send an authentication code to your cell phone or email. The code must be entered before account access is granted. With the code, the crime is thwarted.⁸

• Don’t send personal information via public Wi-Fi. When you have limited Internet access, you may only have access to the Internet via public Wi-Fi. If possible, avoid logging into password-protected accounts. Public Wi-Fi is not secure, reported CSO Online. A better option may be to use your smartphone as a hot spot, as long as you have protected it with a strong password.^{9, 10}

The do’s and don’ts of digital security are important because your data is vulnerable and you cannot always protect it. The companies you work for, and do business with, are vulnerable to cyberattack even when they have strong protections in place. Forbes reported cybersecurity experts no longer believe it’s possible to prevent intrusions. Instead, they advise companies to build systems to limit the data that can be accessed during a breach.¹¹

Educating yourself and your loved ones about digital security and adopting security practices that layer protections is critical. During the holiday season, try talking about digital security. It could be the best gift you give.

Sources:
¹ https://today.yougov.com/topics/technology/articles-reports/2018/03/12/majority-americans-feel-their-personal-information
² https://www.securitymagazine.com/articles/87787-hackers-attack-every-39-seconds
³ https://cybersecurityventures.com/hackerpocalypse-cybercrime-report-2016/
⁴ https://cheezburger.com/8705541/millennials-flawlessly-mock-baby-boomer-speak-in-this-hilarious-facebook-group
⁵ https://www.morganstanley.com/articles/protecting-your-security-online-banking
⁶ https://www.commerce.senate.gov/services/files/01e9888e-b6f8-498c-93b7-6057f04d9af5
⁷ https://www.consumer.ftc.gov/articles/0272-how-keep-your-personal-information-secure
⁸ https://www.nist.gov/itl/tig/back-basics-multi-factor-authentication
⁹ https://www.csoonline.com/article/3246984/why-you-should-never-ever-connect-to-public-wifi.html
¹⁰ https://www.lifewire.com/secure-your-portable-wi-fi-hotspot-2487656
¹¹ https://www.forbes.com/sites/stevebanker/2015/03/03/if-preventing-cybersecurity-attacks-is-impossible/#3e286f92345a

A preview of the SECURE Act, a new retirement bill out of the House of Representatives.

Earlier this year, the House of Representatives passed a new bill called the Setting Every Community Up for Retirement Enhancement Act, aka the SECURE Act. (Acronyms are kind of a thing in Congress.) As the name implies, the bill has important ramifications for people’s retirement savings. In this letter, we want to give you a preview of what the bill is designed to do.

Now, before we do that, it’s important to note that the SECURE Act must first be passed by the Senate and then signed by the president before it actually goes into effect. Many things in the bill could change before that happens, though, so it’s impossible to know exactly what the final law will look like. And of course, it’s always possible the Senate could choose not to pass the bill, or make so many changes that the House decides to rework their version.

That said, the SECURE Act enjoys bipartisan support. In fact, only three members of the House voted against it, with 417 members voting for.¹ So it’s expected the Act will become law sometime soon. As your financial advisors, it’s our job to get familiar with the bill now so we can help you prepare for the changes it will bring.

What is the SECURE Act?
The SECURE Act does many things, but at its core, it’s designed to help more Americans save for retirement. Many of the bill’s provisions are designed specifically for businesses, which we won’t get into at this time.  But there are also provisions that impact regular individuals, including pre-retirees, the recently retired, and even their children. None of these changes are particularly dramatic, but they are important nonetheless.

Changes to IRAs and 401Ks²
One of the changes the bill makes is lengthening the time people can contribute to their IRAs. Currently, retirees can only contribute to an IRA up to age 70½. Once they hit this milestone, they are required to begin making withdrawals, called required minimum distributions. Under the SECURE Act, that age would increase to 72. That means retirees have an additional 18 months to benefit from the tax advantages that come with IRAs.

Another change the bill makes is for new parents. Under current law, you must be 59½ years old to make withdrawals from a traditional IRA or 401k. If you withdraw money earlier than that, you would have to pay a penalty of 10% on the amount you took out. There are a few exceptions, such as if you need the money to pay large medical bills, buy a home, or manage a disability. But, generally speaking, the government wants the money you contribute to your retirement accounts to be saved for retirement.

Under the SECURE Act, new parents will also be able to withdraw funds penalty-free. This is to help cover birth and adoption expenses, and it’s especially helpful for younger parents who have high deductible insurance plans. There is a $5,000 cap on withdrawals, though, and they would need to be made within one year of the birth or adoption.

Changes to inherited IRAs²
Another important change – especially from an estate planning perspective – regards inherited IRAs. For years, one of the more popular estate planning strategies has involved the use of Stretch IRAs. When a parent or grandparent dies, they can leave their IRA to their children, grandchildren, or other heirs. Under current law, the beneficiary can take distributions from their inherited IRA based on their official life expectancy. This allows them to “stretch out” the value of the IRA – and the tax advantages that come with it – for a longer period of time. For example, if a 50-year old with a life expectancy of 85 inherited her mother’s IRA, she could stretch out her distributions over the next 35 years.

If the SECURE Act goes into law, this will no longer be possible. Instead, the beneficiary must take out 100% of the IRA’s assets within 10 years of the original owner’s death. As distributions are taxable income, this could have a major impact on the beneficiary’s tax situation.

Planning ahead
As you’ve probably guessed, this topic is important to all of our clients. Some are older, some younger; some nearing retirement, some far away; and some already there. That’s because, while no single provision will affect everyone, almost everyone will be affected in some way.

As mentioned earlier, the SECURE Act has not yet become law, and it’s uncertain when the Senate will vote on it. That said, it’s important that we start planning ahead. If you have any questions about the SECURE Act, please let us know. Otherwise, we’ll make a point to go over any provisions that affect you the next time we have an account review.

If any of the changes you just read about don’t affect you, but could affect someone you know, please share this letter with them. Or, please let us know so we can reach out to them if and when the bill becomes law. As your financial advisors, we want to ensure you’re prepared for any changes coming down the pike – and we want to ensure your family is prepared, too.

We will keep a close eye on Washington as this bill makes its way through Congress. As soon as the situation is clearer, we will let you know. As always, please let us know if there is ever anything we can do for you.
Have a great month!

¹ “Congressional Leaders Want SECURE Act Passage in 2019,” Plan Sponsor, October 7, 2019. https://www.plansponsor.com/congressional-leaders-want-secure-act-passage-2019/
² “Text of H.R. 1994,” Congress.gov, 6/3/2019. https://www.congress.gov/bill/116th-congress/house-bill/1994/text

The simple answer is probably.  
Historically, the American economy has grown in fits and starts, otherwise known as recessions and expansions. As a result, it is likely there will be another recession in the United States.

What are recessions? When gross domestic product (GDP), which is the value of all goods and services produced in the United States, declines for two consecutive quarters, many people will say the economy is in a recession.¹

Typically, during recessions, unemployment rises, consumer income declines, consumer spending falls, and industrial production and manufacturing slow down.²

The last recession began in 2007 and ended in 2009. It lasted for 18 months, and was the longest recession since World War II.³

What are expansions? An expansion begins when GDP begins to grow again. Usually, during expansions, unemployment declines, consumer income increases, consumer spending grows, and industrial production and manufacturing accelerate.²

The current expansion began in June 2009. It is the longest expansion in the history of the United States.^{3, 4}

 It’s important to note that during recessions and expansions, there may be brief reversals. For example, a recession may include a period of growth before the economy declines further, and an expansion may include a period of decline before the economy grows more. Usually the beginning of a recession or an expansion isn’t identified until well after it has occurred.¹

When will there be a recession?
There is no simple answer to this question.

The causes of recessions are not always easily recognized, reported Robin Harding of Financial Times. When a threat to economic growth is observed, policy makers or central bankers often take action to minimize it.⁵

Recent recessions have been caused by unanticipated financial crises. In 2001, the bursting dotcom bubble sparked recession. In 2007, mortgage loan defaults and the housing crisis were the catalyst.⁵

The longevity of the current expansion has many investors worried about the chances of recession. However, as previous Federal Reserve Chair Janet Yellen commented, “I don’t think expansions just die of old age.”⁶

Despite the inverted yield curve*, which can be a recession signal, Harding wrote:⁵  “There are some signs we are late in the current cycle. Asset valuations are high by historic standards. Private debt has risen a lot in China and some peripheral economies. The Trump administration is rolling back financial regulation. It all increases risk. But the signs of stress that often precede a crisis – wild ebullience or rising defaults – are not obvious.”

In July 2019, the Federal Reserve Bank of New York estimated the probability of a recession in the United States by July 2020 at 31.5 percent.⁷

Fortunately, recessions tend to be far shorter than expansions. The United States has experienced 11 economic cycles – contractions followed by expansions – since 1945. The average length of recessions has been about 11 months. The average length of expansions has been 4.8 years.³

What will the stock market do?
Stock markets reflect investors’ expectations for the future. As a result, they tend to fall before a recession begins and rise before a recession ends. It’s not a very useful pattern because market volatility makes it very difficult to recognize when a market decline signals recession ahead and a market gain signals recovery.

No matter what the stock market does, it’s important for investors to implement strategies that will help them remain calm when markets are volatile. Here are four tips to help you stay focused on your goals when markets are turbulent:

1. Keep your perspective. They may be uncomfortable, but stock market downturns are normal. Historically, markets have regained losses suffered during downturns and moved higher.⁸
2. Choose the right amount of risk. When stock markets deliver strong returns, it can be tempting to invest in stocks more heavily. Before you do, remember more stocks means higher volatility. Choose a portfolio allocation that will let you stay calm during periods of volatility and market downturns.
3. Take time to rebalance. The performance of markets can affect your portfolio allocation. If the stock market does well and the bond market poorly, you may end up with more risk than intended. Rebalancing preserves your allocation.
4. Downturns may create buying opportunities. The silver lining behind the dark cloud of recession is you may be able to invest in strong companies at low share prices.
5. Remember your goals. We spend a lot of time helping clients identify life and financial goals and then designing portfolios to help pursue those goals. The stock market may head south, but that doesn’t mean your goals have changed. Remember why you’re investing.

If you’re nervous about financial markets and would like to discuss what’s happening or just be reassured, give us a call. We’re happy to talk with you.

*An inverted yield curve is where long-term debt has a lower yield than short-term debt.
Sources:
¹ https://www.nber.org/cycles/recessions.html
² https://www.investopedia.com/articles/economics/08/recession-affecting-business.asp
³ http://www.nber.org/cycles/cyclesmain.html
⁴ https://www.cnbc.com/2019/07/02/this-is-now-the-longest-us-economic-expansion-in-history.html
⁵ https://www.ft.com/content/8a9d12a8-ce31-11e9-99a4-b5ded7a7fe3f (or go to https://peakcontent.s3-us-west-2.amazonaws.com/Peak+Documents/Oct_2019_FinancialTimes-Recessions_Have_Become_Rarer_and_More_Scary-Footnote_5.pdf)
⁶ https://www.bloomberg.com/news/articles/2019-01-10/do-economic-booms-die-of-old-age
⁷ https://www.newyorkfed.org/research/capital_markets/ycfaq.html
⁸ https://finance.yahoo.com (Click on to S&P 500, click on Chart, click on Max)