Bet your money on business as America faces next recession

With headlines such as “David Stockman: Market crash will be a doozy,” “We’re right on the brink of a 50 percent stock market crash,” and “A market crash on the scale of 2008 is looming” displayed across respected economic news sites, it is no wonder that many investors are fearful of a large correction or crash in the financial markets.

Significant declines in overall stock prices are generally the result of changes in consensus expectations of overall economic activity. The National Bureau of Economic Research defines economic expansions as periods when economic activity rises substantially, spreads across the economy, and typically lasts for several years. There have been 12 expansion periods since 1945. The current expansion that began in June 2009 is the second longest on record, eclipsed only by the 10-year expansion that began in March 1991.

{mosads}All of those economists predicting a recession are correct. We will experience an economic recession with 100 percent certainty. The only issue is the timing of that recession, and historically, economists have not done a particularly good job of forecasting when they will happen. The field of economics has earned the moniker the “dismal science.” Essayist and historian Thomas Carlyle coined the term, inspired by the gloomy prediction by T. R. Malthus that population would always grow faster than food, dooming mankind to unending poverty and hardship.

The fact that we have been in an expansive economic mode for so long leads many to conclude that we are overdue for an economic downturn. However, the underlying data simply don’t support that conclusion. Even though first quarter gross domestic product growth was a mere 1.9 percent, the Conference Board forecasts growth at 2.8 percent for 2018 and 3.0 percent in 2019. Alternative measures of consumer and business confidence remain near 10-year highs. A greater percentage of Americans are working than at any time in this century, as the unemployment rate recently dipped below 4 percent for the first time since 2000.

The outlook for corporate profitability is the strongest we have witnessed in years. It does not appear to simply be a one-time occurrence related to the recent tax cuts. According to Bloomberg, analysts predict double-digit profit growth on the S&P 500 through 2020. While some pundits are concerned with rising interest rates, as the consensus is that the Federal Reserve will increase rates two to three times before the end of 2018, those higher rates are attributed to a growing economy and near full employment. Those are good reasons for rates to rise.

In other words, a recession does not appear imminent. Still, much of the American public remains scarred from the 2008 global financial crisis and subsequent recession. They interpret each headline and piece of economic news negatively, and assume the next big recession and market downturn are just around the corner. This leads many investors to make portfolio changes in anticipate of a market collapse.

Warren Buffett recently gave Berkshire Hathaway shareholders some perspective in terms of investment timing. He showed headlines from the New York Times in March 1942, when he was making his first investments. This was three months after the United States got involved in World War II. We were losing and the stock market reflected it.

When things look bad, many pundits counsel investors to derisk their portfolios and invest in safe havens. If you listened to the prophets of doom and taken $10,000 and purchased 300 ounces of gold, today you would still have 300 ounces of gold, and it would be worth $400,000. Instead, you had put that money in an index fund to own a piece of American business it now would be worth $51 million.

An old Wall Street adage reads, “You can eat well or you can sleep well.” Investing in safe assets like gold and Treasury bonds ensures that you will suffer no sleepless nights. But committing money to the stock market will allow you and your heirs to build true wealth. The bottom line is that you should not bet against American business.

Robert R. Johnson is principal at Fed Policy Investment Research Group and former president of the American College of Financial Services. He is the co-author of “Strategic Value Investing” and “Invest with the Fed.”