They say what goes up must come down and the economy is usually no different. With the latest economic expansion officially breaking the record as the longest in history back in July of this year, some economists have suggested that our growth trajectory may be running out of steam. In fact, a recent study from the Deloitte Global CFO Program noted that a staggering 75 percent of CFOs surveyed said that they believe there will be a U.S. growth slowdown by the end of 2020. While many economic indicators like unemployment and corporate profits still point to a healthy economy, other data suggests that things may be slowing. One commonly cited predictor of recession is the yield curve, which inverts when short-term interest rates are higher than long-term interest rates. (For example, a 3-month Treasury bill pays more than a 10-year Treasury bond). This recession signal has flashed multiple times this year. These factors coupled with on-going worries about the impact of trade wars on global growth have also led to increased pockets of market volatility.
The problem with recessions is that they can be difficult to forecast. In fact, data suggests that most economists have difficulty predicting future recessions and early warnings like inverted yield curves or ISM data aren’t always effective. For example, an inverted yield curve has limitations as historical data suggests that a recession may occur anywhere between 1 month and two years of when the inversion took place – not exactly a precise indicator. While no one has a crystal ball to predict future slowdowns, the longevity of our current expansion combined with some of the data noted above suggest that it may be a good time to examine your current financial condition. After all - why not be prepared for a slowdown before it occurs?
Whether you are examining your personal finances or run your own business, no one ever complained about having too much in cash reserves during a recession. From the loss of job or a business slowdown to unforeseen expenses or the opportunity to invest during the downturn, building a cash reserve may be an effective way to protect your finances and your wellbeing. While many experts suggest 3 – 6 months of expenses, preparing for an economic slowdown may require even larger reserves. Variables such as your risk of job loss, cyclical nature of the business you operate and other factors should be considered when determining how much to target. Also, be sure to use FDIC insured direct banks in order to earn rates of interest that can far exceed national averages.
When it comes to credit - no one wants to give you money when you need it and everyone throws money at you when you don’t. Securing home equity lines of credit, business lines of credit, refinancing mortgages and consolidating debt can all be important items to review before a potential slowdown. Consider giving yourself additional safety nets as they may help protect you against the impact of unforeseen financial difficulties.
An often-overlooked tool that may be effective in helping to manage risk – especially before an economic slowdown, is the process of portfolio rebalancing. The rebalancing process, when implemented correctly, is designed to help bring the different investments that make up an investor’s portfolio back into proper alignment. As the markets fluctuate over time and certain components of the portfolio over-perform and under-perform, the original investment mix changes, altering the amount of risk in the portfolio.
For example, an investor with a traditional 60 percent equity and 40 percent fixed income portfolio that hasn’t been rebalanced in a few years could now have closer to 70+ percent in equities. This may leave investors with a risk profile that may no longer be in alignment with their goals or comfort level. Rebalancing may help investors accomplish a feat that many find difficult to execute — buying low and selling high. It also requires discipline to sell investments that are performing well while exchanging them for others that may have underperformed. Unfortunately, many investors fail to review and rebalance their investments with any regularity.
There are many important considerations when determining an appropriate rebalancing strategy - there is not necessarily a “one size fits all” approach. Despite the importance of implementing an approach that works for you, the three T’s of rebalancing — timing, taxes and transaction costs — all affect the decision-making process so be sure to review with your financial advisor.
Create a worst-case scenario budget
This concept is simple – develop an emergency Plan-B for your budget and expenses if something goes wrong. Rather than struggle to determine how you will handle a recession, job loss, business downturn, health emergency, long term care need, or even death, consider creating a budget that strips out unnecessary discretionary spending, curbs savings and ultimately reduces the financial short falls until things can stabilize. Keep this playbook in your back pocket for when serious financial issues arise in the future. Too often, people are slow to adjust their budgets when their personal economy is going through a slowdown.
While our economic expansion is the longest in history, there is no guarantee it is going to continue, nor that it is going to end tomorrow so do your best to avoid overreacting. Discipline is key and having a long-term perspective is critical. It is simply prudent to be prepared for a slowdown before it occurs. Since everyone’s situation is unique, consider speaking to your financial advisor to determine the most appropriate approach for you.
Kurt J. Rossi, MBA, CFP®, CRPC®, AIF® is a CERTIFIED FINANCIAL PLANNERtm Practitioner & Wealth Advisor. He can be reached for questions at 732-280-7550, kurt.rossi@Independentwm.com,www.bringyourfinancestolife.com & www.Independentwm.com. LPL Financial Member FINRA/SIPC.