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by Michael Rogan
Special to Tropical Breeze
For a couple of years now, the media has
been predicting that the U.S. economy would slip into recession. In
recent months, that rhetoric has reached a fever pitch. Are they
correct? What is a recession and what does it mean to you?
First, the technical definition of a
recession is two consecutive calendar quarters where the output of
U.S. companies (also known as our Gross Domestic Product or GDP)
contracts. Typically, in recent decades, the economic output
contracts less than two percent before growth resumes, and lasts
less than a year. The percentage of Americans that lose their jobs
grows, but usually by less than two percent. Granted, two percent
represents nearly three million of us, and if you are among those
three million, no doubt the recession could be painful. The good
news is that, at least historically, the average amount of time in
a recession that someone remains unemployed is only about six
weeks.
So, what about this time? Technically,
since the economy grew in the fourth quarter, we can't officially
know we've been in a recession until this coming July. But,
because the economy's growth was so anemic at the end of last
year, the talking heads on TV have been hopping around like excited
monkeys breathlessly warning us that the "R" word is imminent.
Whether they're right or wrong (I'm still betting they're
wrong), the real question is how will this affect you?
Assuming you're among the more than 95%
of people willing to get a job who are still employed, and you're
among the 99% of homeowners whose mortgage is not in default, why
does the media want you to be worried? Is your retirement plan in
danger? Should you play it safe with your investments since
everyone is telling you the market is "in trouble" now, move to
cash, and wait until it feels better? Let's take a cue from
history.
The most recent economic slowdown
parallels the economy of the early 1990s, according to Federal
Reserve Bank of Minneapolis President Gary Stern. Back then the
banking "crisis" that threatened to destroy the U.S. involved
Savings & Loans. As of late 1990, we were facing a war in
Kuwait with Iraq, the government was ineffectively locked in a
stalemate (when aren't they?) and the economy was slowing. So,
would you have been rewarded to have played it safe back then?
As usual, the answer lies with history.
But this time, thanks to the internet and Time magazine, we have
evidence of the danger of acting on your fears. Among other things,
timing a recession is impossible as we rarely know we are in a
recession or for that matter, out of it, until well after the fact.
And we know from history we don't feel an economic slowdown
immediately, nor do we recognize its recovery quickly. This is
compounded by the fact that the stock market moves in advance of
both, as it is always a predictor of the future.
That recession actually lasted less than
nine months, from July 1990 to March 1991. Unemployment, always a
lagging indicator, peaked in February 1992 at 7%. The October 15th,
1990 Time magazine cover story is called "High Anxiety" and it
mentions a "looming recession." Were you to have used that cover as
your cue to bail out of your long term investments in the stock
market, figuring you were getting out ahead of time, you would have
actually been bailing out nearly halfway through the recession, and
at the very bottom of the market's decline! But, that's only half
the battle. When would you get back in?
The September 28th, 1992 Time cover
reflected the mood of the country. Its heading was, "The Economy
– Is there any light at the end of the tunnel?"
Unfortunately, for the person who thought they would play it safe
by getting out of their long term market investments when it felt
bad in 1990, things still felt pretty lousy in late 1992 – at
least according to the media. Problem is that while Time was asking
if things would ever get better, the recession had been over for a
year and a half, and unemployment had been dropping for seven
months. Perhaps most importantly, the stock market had risen nearly
50% from the bottom, which we recall would have been exactly the
time the "market-timing over-reactor" would have likely bailed out.
Those who had simply stayed in through the decline and recovery
would have had seen their portfolios rebound fully within seven or
eight months.
Whether today's situation is the same
isn't important. We do know that this time it isn't totally
different. Eighteen years ago, we were facing war and a financial
crisis. The headlines warned about crises and disasters, doom and
gloom. Those who didn't overreact were fine. People who reacted to
the news of the day cost themselves serious wealth, which they
could have never recovered. For the record, at the bottom of that
decline, the Dow stood at just over 3,000. Today, as I write this,
it has declined all the way to over 12,000 (not counting dividends,
of course).
Michael Rogan is president of Rogan &
Associates Financial Planners, a locally-owned financial planning
brokerage firm based in Safety Harbor. He brings nearly two decades
of financial expertise to the local airwaves on the radio show,
Financial Planning for Life, heard at 11 a.m. weekdays on AM 1250
WHNZ. For more information, call 727-712-3400 or visit
www.RoganFinancial.com.
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