Thanksgiving is a wonderfully colourful season, rich with aromas and tantalizing dishes. While every season fits gratitude, we’re lucky to get our turkey before our southern neighbours. And on the theme of thanksgiving we can be grateful for this year’s rewarding investments. Perspective is helpful because tweets and tremors of an eventual recession continue on many fronts. Today we view the landscape to see how this fits into your financial freedom and lifelong security. (Below, we’ll also share some thoughts on “Expanding Lifestyle” with your financial plan.)
Words can be tricky so let’s review. “Recession” is when overall production (GDP) declines over two calendar quarters, measured by trade, services, and industrial production, accompanied by falling sales and rising unemployment. When investment markets slide we speak of a “dip” at less than 10%, “corrections” of 10-19%, and “bear markets” which crash 20% or more.
2008-2009 markets globally dropped over 50%. That was the world’s worst bear market since 1820. More typical and short-lived fluctuations include 2011 dropping 22%, 2015 down 15%, and 2018’s double-loss at 20% last year. Those periods were not recessions but release some steam and exuberance of more aggressive sectors.
We design our portfolios to purposely mute downside risks and speed recoveries. We speak of this as Life Income Mandates, combined with unique high-conviction positions, and a secure “income reservoir.” We discuss these at times and you can review with me any time in our meetings or here in the website: Life Income Mandates.
Common Question Today: is Recession coming?
I bought my 2020 calendar and recession isn’t mentioned anywhere. Recession is tricky to forecast because signs appear years too early and it’s only confirmed when it’s near done. Our combined research teams (footnotes below) have been measuring year-ahead risks. In mid-summer they suggested possible 45% risk of recession in the year ahead. Today it has dropped to near 40%. The news amplifies this of course, like the threat of Hurricane Dorian which then turned safely out to sea. Recessionary cautions also loomed in 2011 until 2012 surged ahead. Same again in 2015 but 2016 surged forward. It’s wise to be mindful of recession in order to avoid investing in the whole market or riskier sectors, but also to remember the picture is often exaggerated.
Considering times like 1973-1974, 2000-2002, 2008-2009, news media sound the alarm as if recessions were fatal, like SARS or Ebola. Yet to be true, there are always sectors of our economy which are growing or lagging. Banking and Materials were booming during the technology meltdown of 2000-2001. Recent growth has been strong even while Energy continues its 5th year in the ditch. Europe generally is now in recession. And in time, what today is downcast will push forward and pay rich rewards.
There is a silver-lining also in the fact our world’s recovery since 2008 has slow and plodding. A decade has passed and the recovery is 60% of the average recovery. It hasn’t felt much like a bull market as gains were repeatedly punctured: 2011, 2015, then early/late 2018. This is a pattern that allows more growth before recession settles in. If a technical “R” happens sooner it should be modest, just enough to qualify, before markets move ahead again. For illustration, 1820 was our deepest recorded meltdown followed by 1929 and 2008. Such events were 90-100 years apart, and such depths are rare. Garden-variety corrections set a foundation for continued growth to new highs.
Eric Lascelles and team at RBC Global Asset Management share twice as many reasons for continued economic growth, compared to hints of contraction. Reasons for optimism include the slow and prolonged recovery from 2008, Central banks dropping interest rates to all-time lows, economic slack that allows further expansion, greater influence of the service-sector which is more recession-resistant, real-time inventory management, stronger banking regulation, and political intent to cushion weakness and preserve growth. Contrary indicators at some point may include the yield curve (as yet unconvincing), high public debt (easily serviced at today’s low % rates), and international tariffs weakening manufacturing and global trade. This last one alone is key today. So there’s a glimmer of hope as Trump’s supporters carry this burden too. Most expect some easing in terms of U.S. trade with China and Europe, as was recently accomplished with Japan.
Non-recessionary forces: Canadian unemployment at 5.7% is near the lowest in 40 years. U.S. unemployment is 3.7%. Wages are rising at twice the rate of inflation. Inflation is near 2%. Interest rates at historic lows are still falling, easing costs for governments, corporations, and families. Reports show $15Trillion to $37Trillion of global bonds now priced at sub-zero interest rates. US and Canada hint at such possibility too. With an aging population and work force, low % rates could remain stimulative for another decade or more. (NB: tea leaves are not a forecast, and in any event it would not eliminate other dips and corrections.)
Possibly the most effective “YOU ARE HERE” picture is this slide on the business cycle. There are not early days. Mid-cycle is mostly done. Recession hasn’t arrived. We are toggling between early/later segments of “late cycle”. Low interest rates, strong wages, and labour participation are expansionary. Trade tariffs threaten the expansion. So we expect whoever is seeking election this year or next (except Japan where their platform included a higher sales tax) .. will mainly exhibit policies to expand the economy. If the mirage of recession shifts into 2021 or beyond, we’ll come to see it more clearly with time.
Expanding Lifestyle and your Rewards.
2019 has been most rewarding. Many who are drawing retirement income see their account values have outgrown withdrawals. Younger people may notice investment returns added more than their own deposits. Light the candles, let’s celebrate. So consider two ideas: how your lifestyle fits with this growth, and also to maintain a safe “income reservoir”.
Younger and mid-career people are working hard, squeezing the overtime when they can, vigorously paying debt and saving diligently. You might consider a wee break away, even four or five days to freshen your energy and reward yourself. If this means pausing your investment deposits for a month or two let’s discuss this. The market’s 2019 growth could be your “permission slip” to pause deposits, enjoy a special experience away, and resume dedicated savings again by January. If you’re needing such a break let’s discuss what it means for you, and how/when you might do this.
Retired clients: some are at a stage of life when they spend more than investments can replace. Others are under-spending and have the potential to do and spend more. For both groups we aim for two to three years of withdrawals in an “income reservoir” which guarantees near-zero risk. Now back to the permission slip mentioned above, if higher-wealth retirees are holding back on travels plans, home renovations that would enhance comforts, or gifts they want to share among family members, now can be a natural time to talk about this. Let’s meet, look at the value of money for your desired lifestyle, securing the vital goals you and I discuss, and assuring a strong Income for your personal comfort always.
Questions, and Sharing the Gift!
We gain tremendous insights as you share your questions with me. Also from questions others raise in conversation with you. Our SWM team and outside research and portfolio teams are forever grateful to help safeguard your personal goals and lasting comfort. Reach me – tell us how we can expand our services for yourself and your family, also for anyone you know who is wanting personalized financial planning for life!
Final words … let’s be sure we all VOTE this October 21st. Unless you’re away and did so early!
Yours in Financial Security for LIFE!
Brian Weatherdon, MA, CFP, CLU, CPCA. 905-637-3500
627 Guelph Line, Burlington, Ont. L7R 3M7. 1-877-937-3500
** This monthly letter touches on key strategies in Canadian and global investing and financial planning. This letter is not an offer to sell any kind of security, insurance, or program. Historical returns and risk measures are not a valid guide to future performance. Returns are from publicly available sources and research from a variety of firms including but not limited to GLC, RBC, CIBC, Mackenzie, Franklin Templeton. Opinions reflected in this letter belong solely to the author and no other body is responsible for the content expressed here. We value opportunity to consult alongside your legal and accounting firms to advance your financial security and unique goals. We are grateful always to receive your comments and questions.