How to prepare for the next recession | Capital Group Canada | Insights

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ARTICLES  |  MaRCh 2019

How to prepare for the next recession

Featuring
Jared Franz, economist
Darrell Spence, economist

Worried about when the next recession is coming? Our economists share when they think it might happen and answer key questions to help you prepare.

When is the next recession?

That’s one of the questions we hear most often. And for good reason. Recessions can be complicated, misunderstood and sometimes downright scary. With the U.S. expansion nearly 10 years old, investors may be wondering whether the next one is just around the corner. In our 14-page Guide to recessions, our economists offer their perspectives.

In our view, we don’t believe a U.S. recession is imminent in 2019. Our research indicates it is much more likely that the next recession will be in 2020 or 2021. But economic cycles are notoriously hard to predict, and it’s never too early to be prepared for the next downturn.

If the possibility of a recession keeps you up at night, this article ought to put you at ease. That’s because once you read this research about the last 10 downturns you’ll see that recessions may not be as bad as you might think.

The U.S. and Canada

Although this article primarily discusses U.S. recessions, it‘s instructive about recessions in general and their impacts. Since 1970, Canada has experienced recessions at approximately the same time as the U.S., demonstrating the interconnectedness of the two economies.

This article will help you prepare for the next recession by attempting to answer three key questions:

1. What is a recession?

Recessions occur when economic output declines after a period of growth. In the U.S., the National Bureau of Economic Research (NBER) 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." It is also commonly defined as at least two consecutive quarters of declining GDP. In this article, we will use NBER’s official dates. For more information, download the full guide.

The economy is late cycle, but there may still be time before a contraction

chart_big_pic_cycle_2019_rev_638

Sources: Capital Group, FactSet. GDP data are in USD and are latest available through 9/30/18. Country positions within the business cycle are forward-looking estimates by Capital Group economists.

What about Canada?

In Canada, the government is responsible for determining when the economy has entered and exited a recession. It is communicated by the Bank of Canada or minister of finance based on data provided by Statistics Canada. There may also be regional recessions in Canada, as each province has different business sectors. For example, a decline in oil prices could cause a recession in Alberta, but have minimal impact in Ontario.

2. How close are we to the next recession?

Economic indicators are a way to take the temperature of the U.S. economy. One or two negative readings could be meaningless. But when several key indicators start flashing red for a sustained period, the picture becomes clearer and far more significant. In our view, that time has not yet arrived.

The likelihood of a U.S. recession in 2019 is rising, but remains low

NY Fed model: Probability of recession in 12 months

chart_recession_probability_638

Sources: Federal Reserve Bank of New York, Thomson Reuters. As of 12/31/18. Shaded bars represent U.S. recessions as defined by the U.S. National Bureau of Economic Research.

Although some imbalances are developing, they don’t seem extreme enough to derail economic growth in the near term. The culprit that ultimately sinks the current expansion may one day be obvious: Rising interest rates, higher inflation, or unsustainable debt levels can be major triggers.

These events, if they continue, suggest that the economy could weaken in the next two years, placing a 2020 recession on the horizon. But we are not there yet. For more information, download the full guide.

What about Canada?

While the Bank of Canada projects moderate growth with “caution,” more bearish prognosticators believe that the Canadian economy is nearing the end of an economic cycle. With that in mind, preparing portfolios for a variety of economic outcomes may be a prudent move.

3. What should you do to prepare for a recession?

Above all else, investors should stay calm and keep a long-term perspective when investing ahead of and during a recession. Emotions can be one of the biggest roadblocks to strong investment returns, and this is particularly true during periods of economic and market stress.

If you’ve picked up anything from reading this article, it’s probably that determining the exact start date of a recession is ultimately impossible. That’s why aggressive portfolio moves to time the market are rarely a wise decision.

The next recession will come eventually. According to our models, it could be in the next year or even in the next two. Whenever it starts, the best way to prepare for a recession is to make sure your portfolio is designed to be balanced enough to benefit from periods of growth before it happens, while being resilient during those inevitable periods of volatility. For more information, download the full guide

Key investor takeaways

  • Maintain a balanced and broadly diversified portfolio.
  • Balance equity portfolios with a mix of dividend-paying companies and growth stocks.
  • Choose mandates with a strong history of weathering market declines.
  • Use high-quality bonds to offset equity volatility.
  • Financial advisors can help investors navigate periods of market volatility.

 

About

 

Jared Franz
Economist

Jared covers the U.S. and Latin America. He has 13 years of investment experience, four at Capital Group. Prior to joining Capital, Jared was head of international macroeconomic research at Hartford Investment Management Company and an international and U.S. economist at T. Rowe Price. He holds a PhD in economics from the University of Illinois and a bachelor's degree from Northwestern University.

 

Darrell Spence
Economist

Darrell is a research director with 26 years of investment industry experience, all at Capital Group. He is a CFA charterholder and earned a bachelor's degree in economics from Occidental College.


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