Million Dollar Question: When Will the Next Recession Occur?
May 21, 2018
By Krista Biernbaum • Securities Analyst
Life in the financial markets has been good for almost a decade now. The stock market bottomed on March 9, 2009 and has rallied since. Currently, we are in the second longest bull market in U.S. history. This month the current U.S. economic expansion reached 107 months in length to become the second longest expansion since World War II. With the current economic environment on track to become the longest in U.S. history, investors wonder when the next recession will occur.
What is a recession?
The textbook definition for a recession is two consecutive quarters of negative gross domestic product (GDP). Although recessions are a normal part of the business cycle, they can be an unpleasant time for investors who don't have a solid financial strategy.
Will the next recession happen in 2018?
Most believe the odds of a recession over the next year remain low since economic fundamentals remain positive. So when will we see the next recession? No one really knows with certainty. Theoretically, we will not even know the U.S. economy is in a recession until after the fact. Also, trying to predict the next downturn can really cost you because stock returns are usually strong in the months before the start of a recession.
Even though no one can say with certainty when the next recession will happen, there are different key indicators we can use to gauge the current health of the U.S. economy and forecast if a recession is around the corner. The chart below is from the Wall Street Journal’s Daily Shot and it is Credit Suisse’s Recession Dashboard. It shows seven different key indicators and where each metric stood at the start of prior recessions. As you can see, at the start of an actual recession, nearly every metric was classified as recessionary. By contrast, with the exception of inflation trends, all of today's key indicators remain expansionary.
This illustrates that a downturn is not around the corner and the U.S. economic picture remains positive:
Looking to the Future
In another 14 months, the U.S. economic expansion will become the longest in history. After this point, we enter uncharted waters — a place no prior economic cycle has gone before. How we will position our client’s portfolios for these uncharted waters ahead? We will remain fully invested, while keeping an eye on the key indicators above. Our best defense going forward will be managing clients’ risk through broad diversification.
If you have any questions, please feel free to contact us today.