The S&P 500 has fallen 12% from the highs posted last year amid concerns about declines in global growth and damage to the energy sector from falling oil prices. However, economic indicators in the US are still fairly good as outlined by Jill Schlesinger. Certainly the energy fields of Texas, Oklahoma and North Dakota are being hit hard with layoffs and foreclosures in these areas are on the rise, but overall employment across the US has risen steadily since the last recession ended in the summer of 2009 and economic growth, while slow, has been steady. The Blackrock Blog highlights weakness in global manufacturing and credit spreads, but finds that "most leading indicators are signaling expansion." Still, some international stock markets have already fallen by more than 20%, officially entering a bear market, as reported by the Economist.
Economies follow cycles of growth and recession, often driven by optimism and fear. If people are generally optimistic, they are more likely to buy a car or large appliances, or take a chance by opening a small business. This spending puts money in the pockets of other businesses who in turn can then hire more employees and expand. This activity leads to growth in the economy. But if people are fearful, they will cut back on what they spend, delay that vacation and cook more dinners at home rather than eating out. In turn, the restaurants and other affected businesses cut back on staff and inventory. Those cuts cycle through the economy, possibly leading to a recession.
So as fears of recession grow, it becomes more likely that the recession will materialize....and sooner, rather than later. The question is when? And does an impending recession mean you should make changes to your current portfolio?
The answer is, "it depends." It depends on your time horizon for investing - when will you need to withdraw the money in your portfolio? And will you need to withdraw all of it, or just a small portion to supplement your other retirement income? It also depends on what percentage of your portfolio is currently in stocks. If the answer is none - this could be a good time to dip your toes in, buying US and international stocks with 5-10% of your portfolio. If you already have a large allocation to stocks, you might want to delay buying more.
It's notoriously difficult to predict when one particular stock like Apple or a specific sector, such as technology, will fall in value, when they will hit the bottom and when they will start to rise again in value. At Pathways we recommend diversified portfolios with asset allocations appropriate for each clients' time horizon and risk tolerance. We follow the long-term, global macro-economic trends and occasionally make tactical changes based on those trends. Over the past 2 years, we have slowly cut back on investments in US stocks because of rising P/E ratios and fears of inflation and recession.
While the current pull back in global stock markets means values are more attractive, both in the US and overseas, we are concerned that even steeper losses are possible and are not recommending large changes in stock allocations at this time.
Concerned that your allocation is not appropriate? Contact us to arrange a free consultation.