I got into exchange-traded investments in the late 1980s in the form of commodity futures. I still remember the first piece of junk mail I got from a newsletter company. The envelope bore a black ink drawing depicting soup lines, presumably from the Great Depression in the 1930s. The writer was going to save us from this debacle when everyone else would be crushed, just like in the 1930s.
The debacle eventually did come, and we weathered it without nearly the level of damage of the 1930s, but it was a very real and scary event that the writer clearly forecasted—20 years too early!
As we’ve discussed in previous columns, disaster forecasts are the way newsletters get your attention. So how useful are these publications? And specifically, is there any reason to worry that those soup lines will be returning in the near future?
Newsletters are in the business of selling newsletters, and the time-honored way to do that is to appeal to your emotions. If a publication came out with a headline like “Detailed Analysis of Financial Decision Making,” do you think it would sell as many copies as one with the headline “What To Do Before the Next Market Crash”?
The next time you see a prediction of impending doom, remember that there’s a very good chance someone is trying to scare you into doing something.
Which means that there is a lot of reason for you to be skeptical about frightening forecasts. If you read one that scares you, I hope you will take a deep breath, back up a little, and remember that’s what they’re trying to do—scare you!
So why do we believe them in the first place? Because sometimes bad things happen. One analyst recently said that 10 years after the Great Recession, the financial world is still suffering from PTSD. The fear of a repeat is very alive for most of us. And so it’s not that hard to scare people with forecasts of doom, even after 10 years of expansion.
But before we completely write off the scare tactics, let’s take a look at the current state of the economy and why forecasts of impending doom might sound credible.
The current economic expansion is one of the longest on record. Still, there will be another recession, and it seems overdue. Therefore, a recession should come sometime soon.
Well, maybe. Recessions have specific causes. But as long as there are no causes present, the fact that it’s been a long time since the last recession is not a reason to expect the next recession sometime soon. Looking back over the last 70 years, each recession I have studied was preceded by a period during which the economy was running hot. In the current period of expansion, the economy has been growing at an average of 2.3 percent per year. That isn’t my definition of hot.
In many recessions, like the last two, there were bubbles that burst. Apart from the bitcoin bubble—which was too small to matter anyway—I’m at a loss to point to any bubbles. Fears of a double-dip recession loomed in 2010 and for a few years thereafter. However, one clever analyst pointed out that it’s very hard to hurt yourself jumping out of the basement window. We may not be in the basement, but I can see very little that suggests we’re at a height that’s particularly worrisome.
I feel very comfortable telling you that there will be a recession sometime. But I have a hard time coming up with reasons why it will be sometime soon.
I get calls from clients worried our president will do something crazy that will harm our investments. I certainly cannot rule that out, nor can I rule out surprises in general. All I can say is that despite these vague general concerns, our economy continues to grow. Our investments do not have to make money, because the economy is growing, but over time the two tend to go hand in hand.
If you worry a lot about what has not happened, then you probably shouldn’t be an investor in the market. But consider that every day for the last 10 years we have had things to worry about, and still the economy has grown and the markets have gone up.
Hal Masover is a Chartered Retirement Planning Counselor and a registered representative. His firm, Investment Insights, Inc is at 508 N 2nd Street, Suite 203, Fairfield, IA 52556. Securities offered through, Cambridge Investment Research, Inc, a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Investment Insights, Inc & Cambridge are not affiliated. Comments and questions can be sent to firstname.lastname@example.org These are the opinions of Hal Masover and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Past performance is no guarantee of future results.Indices mentioned are unmanaged and cannot be invested in directly.