What goes up must come down. No place does this idiom come into play more than in the stock market, and in no place do people fear more the coming of an inevitability. The stock market is a cyclical being and all evidence points to us reaching the peak of its current cycle. The 2010s was the first decade in history not to experience at least one day of recession and each morning we celebrate a new record for the longest bull market ever.
So, is there going to be a recession in our future?
Do we know when that next recession is going to be?
What we do know is that the stock market, in relation to the U.S. economy, is at an all-time high. This is not a good thing. A 2.6% annual decline in the S&P 500’s earnings is projected for Q4, which would represent the 4th quarter in a row in which it has posted a loss. This occurred as the S&P gained 29% in 2019, signaling that investors are banking on future earnings growth and paying for potential rather than solid balance sheets.
We need look no further than Tesla (NASDAQ:TSLA) for an example of investors pricing in future growth into current stock prices. Tesla’s market cap is currently bigger than Ford’s (NYSE:F) and General Motors’ (NYSE:GM) combined, yet GM sold 20 times as many cars as Tesla in 2019, and Ford six times as many. While Tesla’s growth potential vastly outweighs its two competitors, how long will it take before its earnings justify its $90+ billion valuation?
All this tells us one thing: the stock market is overvalued, and when the stock market becomes overvalued, it corrects itself. We can look further afield for other indicators: the inverted yield curve for U.S. treasury bonds, the fact that 9 of the 14 recessions in U.S. history have occurred the year after a presidential election, cut interest rates, trade tensions, geopolitical unrest, waning manufacturing figures, a rise in nationalism across the globe. All touted as economic tell-tale signs of a future downturn, yet why complicate things? The stock market is overvalued, it’s going to correct itself to reflect a fair valuation. Simple as.
How Can I Tell When the Next Recession is Coming?
There’s a famous story concerning JFK’s father Joseph Kennedy who, after receiving a stock tip from his shoe-shine boy right before the Wall Street Crash of 1929, divested his portfolio and shorted the market, successfully getting out at the top and making a fortune as it fell. Kennedy’s reasoning was that once a shoe-shine boy is handing out stock tips, it’s time to jump ship from an overvalued, speculation-rife market. The less famous undercurrent of this romantic tale of old-timey wit and nous is that Joe Kennedy was an expert in insider trading and market manipulation. The likelihood of the shoe-shine boy being the catalyst in his investment strategy is slim to none. Takes the shine off it just a bit, no?
So, how does this jaunty story from the roaring ‘20s help us find out when the next recession is going to be? First off, if your next Uber (NYSE:UBER) driver gives you a tip to buy Nvidia (NASDAQ:NVDA), don’t take it as an executive order to abandon ship and buy gold. More importantly, it tells us that there will be no divine shoe-shine boy, sent from the heavens to enlighten us on when the bubble is about to burst. The truth is unless you resort to the same questionable tactics as Joe Kennedy, you’re not going to be able to time when the market drops, so why bother?
How to Survive the Next Recession
The golden rules to surviving a recession are the same as the rules for creating long term wealth in the stock market:
- Think long term
- Buy what you believe in
- Never borrow to buy
- Invest what you can, when you can
If you are investing with a long-term, buy and hold strategy, a six-month blip shouldn’t affect your outlook on the business. As our head analyst Rory loves to say, “If you like a business at $50, you should love it at $40.” Your reason for buying a stock should never be “because it was going up”, and inversely, you should never sell “because it’s going down.” By keeping a bit of cash at hand and using these rules as a guide, you can turn the threat of a recession into an opportunity by picking up bargains as the hordes panic-sell.
The likelihood of a downturn in the near future is high, the likelihood you will lose money does not have to be. I’ll leave you with one piece of advice as we venture into stormier seas: Stay ready, that way you don’t have to get ready!
For more related articles, you can read the following:
- 3 Stocks That Will Suffer In A Recession
- 4 Retirement Stocks Every Retiree Should Own
- 5 Reasons Why You Should Not Panic Sell
MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in companies mentioned above. Read our full disclosure policy here.
Financial Analyst at MyWallSt
Michael's first and favorite stock is Square, which he sees becoming a massive player in the payments industry and a leader in the war on cash.