The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Thoughts on Recessions


Sometimes, a recession can be a self-fulfilling prophecy.  If everyone believes a recession is imminent and stops spending, a recession becomes certain.  Of course, public opinion can get ahead of economic data, and that may be happening now.  The mass media blankets consumers with worry, which helps the media and annuity salesmen.  (I cannot call it “fake news” but can call it “un-news” as it hasn’t actually happened.)

While there is an Index of Leading Economic Indicators, there is no Index of Leading Emotional Indicators.

Assuming a recession is approaching but not imminent, then most advisors would shift into more consumer staples and utilities away from consumer discretionary and cyclical stocks, like technology.  This is different from the traditional action of simply shifting out of stocks and more into bonds.  Given the volatility of bonds in recent years, that traditional action is seen less and less.  A variation of shifting from stocks-to-bonds is shifting from stocks-to-cash.  Don’t consider cash as a non-investment.  It has value, especially in a downturn.

Traders and Investors have two very different approaches to recessions.  Traders think they can sell before the market falls and sit on the cash until the market starts to rise again.  While theoretically possible, human nature makes that market-timing approach unworkable, as people invariably sit on the cash too long, waiting for “a sign” to get back into the market.  (Active Traders might get in or out of the market several times a day.)  On the other hand, Investors such as Warren Buffet argue you should “buy and hold” stocks when you like them and sell them when you no longer like those stocks.  Thus, you avoid the risk of missing the upside.  After all, recessions come and go!

The greatest risk falls on recent retirees and those thinking about retirement.  Those investors who are worried about a bad recession and haven’t retired yet, DON’T RETIRE NOW.  Continue to work and invest during the downturn.  If you have recently retired, make sure your monthly distributions do not exceed your actual portfolio income.  If they do, you are consuming your “nest egg.”

There is always a recession waiting for us sometime in the future.  If you’re losing sleep about that, maybe you should put your money into your mattress?

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