While unpredictable, recessions typically last about a year
Are we headed for a recession? Unfortunately, it's near impossible to accurately forecast when recessions start, even for economists. Most economists did not predict the 200809 Great Recession or the recessions of 2001, 1990 or 1982. It took them until well after the fact to call these recessions, typically not until one year after the recession started. For instance, it was not until December 2008 that the Great Recession was confirmed, despite its beginning in December 2007. History has shown that factors such as rising interest rates, higher inflation or unsustainable debt levels can trigger recessions. Additionally, global trade conflicts may further pressure the economy and produce unexpected consequences. A combination of events like these could weaken the economy in the next two years, making a recession a higher possibility. But it doesn't look like we are there yet. For perspective, I like what Paul Samuelson, a Nobel Prize-winning economist, said about recessions, “Predicting exactly when a recession will hit is little more than baseless speculation.” What is a recession? Recessions are generally known as periods of major economic decline, which last at least two consecutive quarters or a few months. The National Bureau of Economic Research (NBER) specifically defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real gross domestic product (GDP), real income, employment, industrial production and wholesale-retail sales.” Investors should understand that recessions are a natural and necessary part of the economic cycle. How long do recessions last? How about expansions? Fortunately, history has shown that recessions generally don't last long. Of the 10 declared recessions that have occurred since 1950, they have ranged from eight to 18 months, with the average lasting around one year. The December 2007 through June 2009 recession was 18 months in length, the longest our country has experienced since the Great Depression. In comparison, the average expansion since 1945 has lasted over five years, including the current one, which is over nine years long. Additionally, the average expansion increased economic output by 24 percent, whereas the average recession reduced gross domestic product less than 2 percent. Clearly, expansions have shown to be much longer and stronger than recessions. What happens to the stock market during a recession? Recessions in general are not good for stock prices, and can cause below-average returns. Market corrections and recessions usually overlap at times, with stocks tending to peak about six to nine months before the economic cycle. The good news is that stocks historically have performed above average in the years immediately following a recession. Always remember that recessions, like market corrections, are part of the economic cycle. But, it doesn't mean certain doom for long-term investment returns. Should investors make any changes to their investment plan? Investors should take the opportunity to review their overall asset allocations, which may have changed significantly during the last few years, and ensure that their portfolios are rebalanced back to original allocation target. They should hold a broadly diversified basket of investments based on their personal financial situation, goals and risk tolerance. In addition to holding stocks, a diversified portfolio should include some fixedincome investments as well, such as high-quality bonds. Fixed income can provide an essential measure of stability and capital preservation, especially when stocks are volatile. Another way to ensure investors are ready to weather a recession is to make sure an emergency fund is fully funded. Nonretirees should use any future recessions or market corrections as an opportunity to buy stocks at lower prices, which means future expected returns are higher. Lastly, most investors should consult with a financial adviser to ensure that they don't allow emotion to cause them to make irrational financial decisions based on economic or market events. Paula Burkes, Business writer