The tenacity of the current bull market begs the obvious question as to when it will end and, as we approach the election, uncertainly is heightened by recent lackluster GDP reports. In a recent issue of Kiplinger, James Glassman points out that although Americans consider the economy the nation’s “most important problem by far” (according to a Gallup poll), “you may be surprised to learn that the U.S. is currently in the midst of its fourth-longest expansion ever.”
According to Glassman, recessions usually occur when the Fed hikes rates over concerns that the economy is accelerating and inflation is rising. In response, it will raise rates to slow things down. Low rates, on the other hand, are meant to speed up the economy, but Glassman points out that GDP has expanded a “measly 2.1% per year” since 2010, and last week’s reports (1.2% growth in the second quarter) have not risen hopes that this will change any time soon.
For the stock market, however, Glassman refers to the low interest rate environment and paltry expansion as “delightful”, making the preference for stocks over bonds “screamingly obvious.” However, he writes, if you knew when a recession would hit and sold your stock portfolio in anticipation of it, “you wouldn’t know when to get back into the market to capitalize on the eventual rebound.” He says that instead of fretting, prepare for a recession as follows:
- Develop a diversified portfolio that stresses asset allocation over stock picking;
- Feed new money into stocks and bonds (or funds that own these assets) on a regular basis;
- Remember to re-balance your portfolio approximately every 6 months.