The following column from Jennifer Pagliara, CapWealth Senior Vice President and Financial Advisor, was posted by The Tennessean on Feb. 2, 2018.
2018 marks the 10th anniversary of the beginning of the Great Recession. At times, it feels like the economy is still healing, but on the whole, we have come a long way since then.
With the stock market at all-time highs, unemployment down to 4.1 percent and U.S. home foreclosures down to some of the lowest levels since 2005, it’s natural to worry about being able to continue on this trajectory. But should we be bracing for another recessionary cycle? Let’s take a deeper look.
What is a recession, after all?
To take some ambiguity away from what a recession really is, let’s define it. A recession is most commonly defined as two consecutive quarters of declines in quarterly real GDP. The National Bureau of Economic Research offers a more detailed definition:
“A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.”
The Great Recession lasted 18 months and was triggered by the bursting of “an enormous speculative housing bubble,” generated by a perfect storm of low interest rates, lenient lending standards, ineffective mortgage regulation and lacking loan securitization, according to a 2011 study released by the Federal Reserve Bank of San Francisco.
While devastating to the economy and to many people and industries, which are still struggling to recover today, a lot was learned from the Great Recession, and many changes have been implemented in both policy and regulation to protect the country from a similar crash.
Where are we today?
While recovery has been slow, it’s been purposeful, driven by caution across the board.
The Federal Reserve has kept interest rates low, easing the burden on those in debt (while counterproductively slowing gains for savers, however). And, central bank regulation is at an entirely different level than it was pre-Great Recession, completely changing how lending institutions operate today. The difference is so great, in fact, that Trump’s administration is seeking to loosen some of the restrictions applied 10 years ago to allow banks back in the game a bit more, if you will. This will likely produce a positive boost to our economy.
Also contributing to the advancement of the economy has been extraordinarily low inflation. Even as growth has picked up, inflation has remained low, meaning that as businesses are doing better, people are making more money and their paychecks are going farther.
What’s to come?
The stock market has always been considered a leading economic indicator, and the health of the economy was certainly reflected in last year’s double-digit positive performance across all major indexes (Dow +25 percent, S&P 500 +21 percent and Nasdaq +28 percent). Circling back to our original question, can this upward momentum continue or should we be on the lookout for a significant stock market correction?
In November, Vanguard Group, one of the largest investment management companies in the world, released research suggesting a 70-percent likelihood of a U.S. stock market correction. However, the prediction was not delivered with alarm, but rather with the intention of preparing investors for an impending downturn and setting right expectations for what the future could look like.
It’s important to note, however, that a stock market correction doesn’t mean we’ve entered a recession. A natural pullback allows the market to consolidate before going toward higher highs. It’s a natural function in the market cycle.
Other factors — such as interest rates and inflation, which are both expected to rise in 2018 — will have more of an impact on a possible recession in the economy. But in usual cautionary fashion, the Federal Reserve is likely to only raise rates slightly, and even inflation is expected to maintain a snail’s pace in upturn.
So, don’t panic.
Warren Buffett has said, “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”
I urge you not to panic when a market correction does come. Because it will come, it is inevitable. What’s more important to focus on is the general outlook of your investments. If your perception of the company’s future earnings hasn’t changed, then a correction may only be an opportunity to invest more into those future earnings at a discounted price.
Jennifer Pagliara is a senior vice president and financial adviser with CapWealth, LLC, and a proud member of the millennial generation. Her column speaks to her peers and anyone else that wants to get ahead financially.