At the moment, I don’t believe we’re going to slip into a recession. Our economy is growing. It doesn’t feel like it if you’re one of the millions of workers that is “underemployed”. I hate that word. Our official unemployment rate is 5.3%. Our reality is probably more than twice that high but it isn’t reflected in our official number due to the vagaries of statistics. Mark Twain was correct when he asserted that “there are lies, there are damn lies, and then there are statistics”.
A few days ago we posted a blog post talking about the possibility of a market correction. We don't know if it's starting now or not, but we are going to see more volatility in the coming months.
The reason for this is that emerging market economies are slowing, with China being the chief culprit. Developed countries (U.S., U.K. and the Eurozone) economies are still growing. In fact, the U.S. and the U.K. are considering raising interest rates to get them back to normal.
We're six years into a surging bull market in U.S. equity markets. Bull markets usually last five to seven years. The stock market is valued above its historical average. We're due to have a correction in the stock market. Will it happen in August, September, or next year? Nobody knows.
It's important to be prepared for a correction. I'm going to talk about how we do that from a portfolio standpoint, and just as importantly, how we prepare for that emotionally.
The US economy in the first quarter showed it's sharpest pullback since the recession, recording a 2.9% contraction in GDP. So why is the stock market still in record territory?
Statistical data are backward-looking indicators. It tells us where we've been, in this case, a few months ago. The stock market is a forward-looking indicator. It tells us what we expect earnings to be in the future, based on the economic outlook (GDP growth), market expectations for future fiscal policy (laws passed by Congress) and monetary stimulus (implemented by the Federal Reserve).