Streetwise for Friday, March 30, 2018

As a nation, we have spent much of the past decade wondering when the economy would recover from the Great Recession. Now, the question de jour is when and how will the ongoing recovery end?

There is no sign that the rebound will end anytime soon. Unemployment is low, job creation is strong, and the overall economy seems to be gaining momentum, not losing it. Most economists, myself included, expect the expansion to continue well into next year.

Research has found that economic expansions do not die of old age. They end because something – a policy mistake, an asset bubble, an outside shock such as a stiff rise in interest rates – causes them to.

Nellie Liang, who led the Fed’s financial stability efforts after the financial crisis, believes that the United States has stayed out of trouble since the Great Recession because regulators learned lessons and formulated policies that increased the strength of banks and other financial institutions.

Which begs the question of whether Congress, in all their wisdom, will undo much of the regulatory environment that enabled financial institutions to walk the straight and narrow.

Recessions do not have to come every 10 years. However, as Liang and others have said repeatedly, after years of low interest rates and steady gains, investors could be caught off guard if or when the economy hits a speed bump.

At the same time, I can never speak often enough to the question of whether you should invest in today’s market, given the never-ending din of voices calling out, “the correction is coming, the correction is coming,” but always leaving out the when and the why.

If the economy manages to expand for an additional 16 more months, the United States will have set a record. Nonetheless, when a recession arrives, the timing is likely to be a surprise.

Data from 1968 to 2017, supplied by the Federal Reserve Bank of Philadelphia in its quarterly Survey of Professional Forecasters, shows that while professional forecasters as a group have had some ability to assess the probability that G.D.P. will decline in the next three months, they have exhibited no ability to do so a year in the future.

In fact, the latest survey gives a 17 percent probability that real GDP will decline a year from now – which is the average probability for a decline in one year given in all the surveys since 1970. What these forecasters are saying is that there is nothing special on the horizon and the risk of a recession is average.

So, my advice is always the same, there is no bad time to invest, just bad…no make that “inappropriate” investments.

Unfortunately, every time a company’s management is caught in the mandibles of unsatisfied expectations, its shares follow the glide path of a brick amid the shrill cries of discontent from a cadre of prognosticators.

While not one to often quote Scripture, you might want to again consider the wisdom found in Ecclesiastes 11:1-12, “Cast your bread upon the waters…for you do not know which will succeed, whether this or that, or whether both will do equally well.”

Think of the equity markets as that which can increase your wealth, but only if you undertake the risk of casting your investment dollars upon its waters and have the patience to wait for the associated returns.

Yes, the uncertainty over the direction and health of the economy will reign supreme in the months ahead. It will also result in some bargains as earnings are subjected to the scrutiny of Wall Street and the inescapable consequences of less than stellar forecasts.

My suggestion would be to use any pullback as a possible opportunity to strengthen your portfolio. However, I want to clarify a misunderstanding held by some who have written to me.

Although I remain a strong proponent of long-term investing, you cannot assume that the share prices of even the highest quality companies will continue to increase uninterrupted over the years.

For proof, you need only consider companies such as the old AT&T and General Motors both of which were considered at one time as being suitable for widows and orphans.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.