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Here's What We Know for Sure About the Next Economic Downturn

By Motley Fool Staff – Updated Aug 12, 2019 at 2:30PM

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Our hosts talk about whether we are better prepared for the next crash.

On the grand scale, the U.S. economy has been in growth mode for about a decade now, and while there have been some mild hiccups along the way, what we haven't endured is the serious recession that so many pundits have been predicting. "Beware! This expansion has lasted too long! Trouble is right around the corner!" That's what we've heard for the last five to seven years.

The litany of warnings got one Motley Fool Answers listener thinking: Given that we've all been warned, and presumably are therefore better prepared for this crash than we have been for past ones, will that change the shape of our next downturn?

Unsurprisingly, opinions on what that recession might look like are all over the map -- and there are even some experts who suggest that thanks to changes in the economy, cyclical downturns may not be inevitable anymore. (Yes, that sounds a lot like the hubris-filled "This time it's different" statement that is usually followed by the painful discovery that, no, it's not different.) In this segment from the podcast's July mailbag show, hosts Alison Southwick and Robert Brokamp, along with special guest Ross Anderson, a certified financial planner at Motley Fool Wealth Management -- a sister company of The Motley Fool -- weigh the various views, consider what history teaches us, and more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on July 30, 2019.

Alison Southwick: Our next question comes from Ben. "We've all heard a lot of concerns about the next big recession, bubble, or drawdown; so a lot of people are preparing for this event. Given that previous bubbles -- such as the internet bubble and the financial bubble -- were caused by irrational, unprepared exuberance, what might the next recession or bubble be? Would it mean a faster, sharper drop or might it not be not much of a drop at all?"

Ross Anderson: It sounders like Ben has been reading some Robert Shiller.

Southwick: Has he been an "awfulizer" lately?

Anderson: Well, he wrote Irrational Exuberance. I was just relating to the use of that "exuberance" word.

Robert Brokamp: So the answer, Ben, is nobody knows.

Southwick: Nobody knows...

Brokamp: But I do want to address the question. It is coming up more because, as we talked about in a previous episode, we are now in the longest economic expansion in U.S. history, or at least since the 1850s when they started marketing these things. Leading up to it, people are like, "Oh, boy, this is getting pretty long in the tooth. Maybe I should play it more defensively." But it probably didn't work out so well, because this year has been pretty good.

Anderson: How many years have you been asked this question?

Southwick: 10.

Brokamp: Since the first day we started doing this podcast.

Anderson: That's the tough part about this question. You could say, "Well, it looks a little long in the tooth. Things look a little pricey." You could have said that since 2012 and you'd still be right.

Brokamp: And I have been, probably since 2014-2015, referencing the Shiller CAPE, the 10-year cyclically adjusted price-to-earnings ratio which looks very high. For years people like me -- and many others -- would say, "Well, the stock market is high and historically when the stock market is high, future returns are not quite so good." But it just hasn't come through, which is why one thing we have always said is you're just never going to be able to time these things.

I do find it interesting to read about them. For example, there's a company called Osterweis Capital Management. They came out with their July report. And they basically suggested that maybe the economic cycle is somewhat dead. It used to be caused by inventory. What would happen is during the beginning of a recovery people would have some money. They'd go out and buy stuff -- actual stuff -- and the company would be like, "There's more demand. We're going to hire more people. We've got to make a lot of stuff." It would be this cycle until eventually they had too much inventory and people weren't buying all of it, so companies had to start laying people off and dropping prices.

Anderson: Dropping prices.

Brokamp: But these days so much of our economy isn't inventory.

Anderson: Services.

Brokamp: It's services. It's data. It's the internet. And technology, itself, is very deflationary, so it keeps prices down, which is another thing that can cause a recession; too much inflation. So do I really believe that the economic cycle is dead? Probably not. I do think things are different and I do think that there's no way to predict how any of this is going to happen.

There is another interesting article by Mark Hulbert in CBS MarketWatch. It basically showed some data and said what we do know is that the severity of a bear market is not historically related to the length of the bull market beforehand, but the severity is somewhat related to the valuation of the market before the market tanks. This would suggest that when the bear market eventually does come, it will probably be more severe than average.

But as was discussed earlier on the show, history is a very imperfect guide, so we don't know. The bottom line is the same stuff we always say. Have enough cash on the side. Also, the big thing I think people need to think about when it comes to a recession is not just your portfolio. Your job is threatened, so always be focusing on making sure that your human capital is doing well. Your job is secure. You have a back-up plan if something happens.

Southwick: I don't remember the internet bubble, not because I'm so young, but maybe because I'm so young. Do you remember during the internet bubble that you were thinking, "This is a bubble. This can't last." I remember during the housing bubble thinking, "This is unsustainable. Housing prices are bananas. This is not going to last." But I wasn't working at The Motley Fool back then.

Brokamp: I was. I started in 1999. Rick was here, too. I would definitely say that I personally thought that this time was different. We are living in a new world. The internet is such a disruptive technology. Investing has become more democratized. All these things I certainly bought into.

In talking about things being different, if you had said to anyone at The Motley Fool in 1999, "Oh, by the way, the next decade will be the worst decade for stocks since the 1920s, including the Great Depression," we would all laugh at you. But that's what happened. From 1999 to 2008, the S&P 500 for the first time ever lost money every year on an annualized basis. So things can be different than the past.

Engdahl: We were right about everything being different because of the internet. We were just a decade off. Now it's different.

Anderson: And it really has changed everything. It's changed how we do business. How we do banking. How we get information, but it didn't necessarily change that valuations can go absolutely bonkers and be sustainable.

Brokamp: We've talked on a previous show that Australia hasn't had a recession since I think 1990. Can we do something like that, too? I don't know. I don't think it's likely, but I wouldn't mind it.

Southwick: I think we need to do some on-the-ground research in Australia to really find out.

Brokamp: I think that is a great idea!

Anderson: On location.

Southwick: Let's get a boondoggle set up. Can we make this happen?

Engdahl: Let's take this show on the road.

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