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Stock Market Recession in 2020 (or even 2019)? How to Prepare

May 1, 2019

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YouTuber, Money Expert, Educator, Traveler, Rebel, and #1 Book Nerd. My mission is to empower you with the mindset and financial know-how to get more of what you want out of life.

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There are 2 useful metrics you can look at to predict if we’re headed for a stock market crash next year, or even this year. I’ll also give you some tips on how to recession-proof YOUR portfolio and even position yourself to MAKE money from a stock market crash.

Watch the video below or keep reading for some tips on how to predict and prepare for the upcoming recession.

Metrics to watch

Since the last big recession in 2008, the S&P 500 has almost doubled in price. And if you count from the very very lows of that recession, the S&P 500 has more than quadrupled in price since then So the stock market has been doing extremely well for the last 10 years. In fact, it’s been the longest bull run in history! Based on the market’s historical patterns, the market is cyclical and goes through a recession roughly every 7 years. So we’re long overdue.

The strength in the stock market has been due to a number of factors – obviously, the U.S. economy has been doing really well – lots of growth, low unemployment. But also the Federal Reserve has been keeping interest rates low and printing lots of money. And they’ve printed trillions of dollars in the last 10 years. This results in the system getting flooded with cash, and this cash has to go somewhere. So the market has been going up largely because there’s nowhere ELSE to put all this money, not necessarily because market fundamentals are strong.

Wilshire 5000 / GDP

How do I know that fundamentals are out of whack? Take a look at the Wilshire 5000 / GDP ratio – this is an indicator that Warren Buffett watches. The Wilshire 5000 is a market index that tells you how the U.S. stock market is doing as a whole. It’s a lot more comprehensive than the S&P 500 because it includes ALL U.S. stocks, not just the 500 biggest ones. Logically, the stock market is linked to GDP, and GDP is linked to the stock market.

Source: https://fred.stlouisfed.org/graph/?g=qLC

When you invest in the stock market, you’re essentially investing in companies that sell products and services – and that’s what the economy is – companies selling products and services. So it wouldn’t make sense for the economy to grow without the stock market also going up. On the flipside, it doesn’t make sense for the stock market to go up a lot, if the economy doesn’t grow with it. Right? It’s just common sense.

If you look at the Wilshire / GDP ratio, most recently it was right around 1.62. And you can see that it’s HIGHER than where it was right before the last 2 stock market crashes. Before the dot-com bubble in 2000, the Wilshire/GDP was 1.18, and before the 2008 crash the Wilshire/GDP was 1.01.

So this is the first signal that tells me we’re poised for a stock market crash. When the stock market is trading so high without the GDP to justify it, a correction is bound to happen. It could be this year, next year, the year after that – who knows. Timing the market perfectly is impossible, but the Wilshire/GDP ratio is definitely telling me to be more careful at this point in the cycle.

Inverted yield curve

Another signal is the inverted yield curve. Typically, the 10-year interest rate is usually higher than the 2-year interest rate.

The longer the loan period, the higher the interest rate. Why? Because when a lender locks up their money in a loan for a long time, they know they’ll have to forego other investment opportunities with that money until they get paid back. So they need to get compensated for that.

But now that the yield curve is inverted, that means lenders are charging more interest for shorter term loans than the longer ones. The 2-year rate is now higher than the 10-year rate. This could imply that lenders think there will be lesser investment opportunities in the future because the economy is slowing down, so they’re ok with accepting lower interest rates for long-term loans.

It’s quite technical and I don’t think anyone REALLY understands it, but what we DO know is that since the 1960s, the yield curve has inverted before every recession. The recession doesn’t happen right away, and it could be a while before anything happens, but again, the inverted yield curve is just a signal that tells you to be a little more careful at this point in the cycle.

Tips to recession-proof your portfolio

Now let’s talk about some ways to recession-proof and actually position yourself to MAKE money when the next recession happens.

Obviously if you’re planning to retire soon, you probably want to start moving some of your money from stocks into things like bonds and cash. Because if you have to starting living off your nest egg pretty soon, then you don’t want to risk that nest egg shrinking a lot.

But if you’re still young and don’t really have investments yet, then the recession is going to be a really great opportunity for you to buy a lot of stocks very cheaply.

Here’s one my favorite quotes from Warren Buffett:

“Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons.”

In other words, the stock market doesn’t crash very often, but when it does, everything will be on sale and you’ll want to buy stocks in truckloads. It’s the exact same concept when there’s a big sale at the grocery store. Like when Whole Foods is doing a 5/$5 deal on my favorite yogurt, I load up!

So you want to be ready to do the same with stocks.

To recession-proof your portfolio, you’ll want to have some cash reserves in there, rather than having 100% tied up in investments. That way, you’ll have some dry powder to deploy when a crash happens.

And meanwhile, you want to use this time to build up a watchlist of stocks you WANT to buy. Make a watchlist of the companies that will SURVIVE a recession and come out stronger than ever. What do I mean by that? Whenever a recession hits, the weak companies go out of business, and the strong companies that are still standing end up taking over that market share and coming out of the recession EVEN stronger.

The key to finding these kind of companies is to look for the ones with a super-strong competitive advantage – i.e. a moat – in other words, something that sets them apart from the competition that will ultimately help them stay on top. Yes, these companies still suffer during a recession, just like everybody else, but they don’t suffer as much because they have an edge over their weaker competitors.

You also want companies with a manageable debt load because too much debt is going to kill you during a recession when your revenues go down but you still have to make fixed payments on your debt. So you want to take a look at the financial statements to see what their debt payments look like relative to their cashflow and evaluate if they have enough cushion there to weather a downturn.

It’s impossible to know exactly when a recession will happen, but when it does, you want to ready. You want to know which stocks you want to buy and what price, and you don’t want to be scrambling to do research amidst all the chaos and fear. When everyone is panicking and selling, you want to be the one buying. And ultimately, you’ll end up with a portfolio of investments that you understand really well, that you’ve bought at a great price, and are proud to own.

I think a lot of people my age tend to stay away from stocks because they don’t trust the stock market right now and they prefer to invest in cryptocurrency and that kind of stuff. But never forget that the stock market has made a lot of people rich, ever since it came into existence, and it will continue to do so, regardless of what happens in the short-term.

I hope this post has helped you feel a little more comfortable about investing in stocks and given you some good pointers on how to prepare for AND benefit from the next market cash.

Now I want to hear from you.

How are YOU positioning yourself ahead of a recession? Are you investing at the moment, or are you waiting on the sidelines and sitting on cash?

Join me in the comments below and let’s help each other make better investing decisions!

That’s all for today, thanks so much for watching. If you liked this video, hit that subscribe button below, and share this video with your friends so we can open up the conversation around money AND build a sisterhood of financially savvy, empowered women!

Always remember to go after your dreams unapologetically and to live life on YOUR terms. Cheers.

 

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YouTuber, Money Expert, Educator, Traveler, Rebel, and #1 Book Nerd. My mission is to empower you with the mindset and financial know-how to create a life of TOTAL freedom.

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Rose

YouTuber, Money Expert, Educator, Traveler, Rebel, and #1 Book Nerd. My mission is to empower you with the mindset and financial know-how to get more of what you want out of life.