The current U.S. economic expansion recently enjoyed its ten-year anniversary. This means that for the past decade the economy, as measured by the nation’s gross domestic product has been consistently growing without a measurable pull-back, or recession. This long expansion follows the very difficult economic decline of 2008 and 2009, a period often referred to as the Great Recession.
If you are a stock investor who has been keeping an eye on recent headlines, you may wonder how long this expansion will last, and what may trigger the next economic downturn or recession. Read on for some perspective.
Expansions don’t die from old age
Fortunately, recessions do not come and go based on the calendar. Often, recessions are the result of imbalances in major economies built-up over a period of expansion, as evidenced by the housing bubble in 2007 and the dot-com bubble in 2001. However, despite the longevity of the current expansion, the U.S. economy currently seems to be on solid ground.
History tells us that in some cases, a specific event may also send the economy into a recession. An example occurred in the mid-1970s as gasoline availability was curtained by the OPEC oil embargo. In the early 1980’s the U.S. economy also suffered a particularly painful economic downturn after the Federal Reserve moved interest rates sharply higher to finally curtail inflation problems.
What could create a setback today?
So, if old age doesn’t cause an economic downturn, what will? The answer is that many unforeseen events could trigger a recession. Predicting the timing of such an event is virtually impossible. Many analysts and investors are watching key global trends for insights that may be warning signals for what is going to happen in the economy.
Currently, trade turmoil represents one of the most notable risks to the intermediate-term economic outlook. The ongoing dispute between the world’s two largest economies, the U.S. and China, has already had a negative impact on the pace of global growth, and the impact could rise. The United Kingdom and European Union also still seek an agreement to lessen the economic disruption of the U.K.’s pending exit from the Union. Federal Reserve interest rate actions and pockets of geopolitical unrest are also important to watch and something experts monitor closely.
How to prepare for future uncertainty
Whether the expansion continues on for a while or comes to end in the near term, it’s important to remember that it’s normal for the markets to move in cycles, with periods of expansion and recession. And historically, the markets have rallied and risen higher after times of decline. That being said, if you’re nervous about what a possible downturn in the near term could mean for your portfolio, consider the following four steps:
Maintain a properly diversified portfolio that effectively represents your true views on risk.
Focus on owning quality investments, which may include well established stocks and high-grade bonds.
While a market pullback can be a painful thing, every downturn comes with potential opportunities. While the investments you hold may be dropping in value, the investments you want to buy could be getting cheaper, making it a good time to consider buying.
How long you have before you need money is a key factor to how well your portfolio may withstand future uncertainty. If you have decades before you need to withdraw (such as your retirement savings), it’s possible that volatile markets could actually work in your favor, due to the power of compound interest. On the flip side, if you need money in the near term you may want to consider reducing your risk or selecting investments with more downside protection.
Talk to a financial advisor who can assess your current financial situation and investments. Together you can discuss whether making any changes could help you be more prepared for what may lie ahead.
