Never has a recession that may or may not…or maybe already happened been talked about so much. If we made a scrapbook that chronicled the opinions of expert economists at the beginning of the year versus the outcome, it probably wouldn’t leave you feeling very confident in economists. Weathermen take a lot of heat, but sometimes I would prefer Bill Taylor on weather than any economist on the economy. Its not that economists are bad at what they do, it’s just exceptionally difficult to see a year into the future given all the variables in a global economy.
Since 1971 the USA has experienced seven recessions with the last one coming in 2020. But what exactly is a recession? It a significant, pervasive, and persistent decline in economic activity. If you’re thinking “there is a lot of room for subjectivity in there,” you’re right. Perhaps you have heard the more common saying that a recession is two consecutive quarters of GDP (gross domestic product) decline. That measure has accompanied every recession for the last fifty years, but it doesn’t guarantee a recession. Its like saying if you throw 4 interceptions in a football game you will lose – while that is generally true it’s possible that exceptions exist, just ask Trevor Lawrence. The National Bureau of Economic Research ultimately decides when we were in a recession based on their view of a myriad of economic data that is all reflective of change that has already occurred.
The reason people speculate about the economy is the same reason speculate over the weather. They want to have some sense of control over the future so they make decisions and plan for the probability of different outcomes. No one likes discovering they left their car out in hailstorm, and no one likes being caught in an investment that gets hammered in a recession. While it is helpful to consider the impact of a recession on your portfolio, the reality is that much of your wealth is designed to meet your long-term needs. If you asked me what the economy will do this year, I can give you an informed opinion based on my experiences and beliefs, but that’s probably not the question you should be asking. The question most investors should be asking is this: what will the economy do for the next decade and beyond? I don’t want to sell you bubble wrap for your car every time the weatherman predicts a hailstorm. I want to build you a garage that you can park in, so that you don’t ever have to even think about the hail.
Just like with a storm, it may or may not materialize, be as severe or as long as some might predict. Take a long term approach to short term changes and know that storms, even if they do occur are temporary. Don’t let what may or may not… or already has happened keep you from being the committed investor that gives your future self the best chance of financial success.