The Economy and Financial Markets: Forecasting What They ‘Might’ Do

Economy in 2019 and Beyond

I expect the probability of recession will increase substantially by mid-2019 into 2020. How do stocks perform during recessions? There have been 23 recessions in the U.S., including the one that started in 1899 and continued into 1900. I have studied each one. Let’s look at the following chart. The red, vertical-shaded areas indicate recessions. The blue line is the Dow Jones Industrial Average.

Notice how stocks declined at the beginning of every recession except 1919 and just after WWII.

Now we will look at how a stock investor would have fared if they had invested on the first day of each recession (please refer to the following chart). This chart shows the return of an investment from the beginning to end of each recession.

In most cases, the investor suffered a loss. In general, the worse the recession, the greater the loss. Where do we go from here?

For Clients

This section is for clients, based on three categories:

1. Newer clients/accounts with a lot of cash
2. Clients who are invested, but are not withdrawing money
3. Clients who are invested and are withdrawing money

1) Newer clients or accounts with a lot of cash

• I put some cash to work in stocks near the most recent bottom. I will find a home for the rest. There are many places to invest, but I will not chase returns (buying at peaks). We need to be patient and prudent. Better buying opportunities will come.

2) Clients who are invested, but ARE NOT making withdrawals

• Be patient. You should be fine. I do not expect a major crisis, at least there is nothing on the immediate horizon (see general comments below).

3) Clients who are invested, but ARE making withdrawals

• If your annual withdrawals are less than 4-5% of your total financial assets, you are in a better place. If your withdrawals are greater than that, it could pose a problem, depending on the size of your nest egg.

General Comments

There are some risks as follows:

• The Fed has been tightening (raising interest rates and reducing the money supply).
• The Trump tariff talks
• The slowing global economy (outside the U.S.)
• The large amount of corporate debt. While interest rates were artificially low, corporations have used this “cheap” money. As rates rise, smaller companies may be hit worse as their debt is not fixed, but resets as rates go higher. Larger corporations have more fixed-rate debt.

As of this point, I expect to reduce stock exposure sometime next year. I will have to wait until we get closer to know when. As I have stated repeatedly, there are four possibilities with an investment.

• Large return
• Small return
• Small loss
• Large loss

My goals, has, and always will be, to avoid large losses. Remember, if we can avoid large losses, we won’t need super-high returns to come out on top.

If you have any questions, please let me know.