With 2019 coming to an end, and talks of recession in 2020, I wanted to bring forward something for purely an educational purpose. This is especially relevant for beginners and also for those who try to time the market.
The fact is, Economists have predicted a recession for each year, since the last 10 years.
Here’s a look at 10 years of ‘Recession is coming warnings
But what actually happened in these 10 years?
- US witnessed one of the best bull runs in its history since World War II, with an astounding 468% gain for the S&P 500.
- India’s own SENSEX shot up by around 350%.
But here’s where the predictions get worse
Absolutely no economist saw the 2007-2008 financial crisis coming.
- Housing crisis in the US set in around June 2006.
- The first trigger of the crisis came sometime around May of 2007.
- The markets started to crash by September 2007.
If you try and look for predictions before June 2006 of the financial crisis just around the corner, you’ll find none.
The first public prediction came from Nouriel Roubini, an economics professor, in August 2006. You can read that article here. But by then the housing crisis had already set in. And as the article also says, absolutely no other economist agreed with him.
Here’s a quote from the article.
While many economists share Roubini’s concerns about imbalances in the global economy and in the U.S. housing sector, he stands nearly alone in predicting a recession next year.– August 2006
There are several articles about Raghuram Rajan having predicted the crisis. But he merely argued that a disaster “might loom”. This was in a paper in 2005. But considering how its possible to find a warning of a recession for any year, its indeed possible for someone to be right sometime.
So what’s the takeaway?
Absolutely no one can predict a market recession.
The only time economists and financial pundits have all the answers, is after an event has already occurred.
There are plenty of articles online about Yield Curve Inversion being a good predictor, but even that has been wrong twice.
How do you invest when there’s always a ‘recession is coming’ warning?
There will always be noise. And indeed a market correction or a slowdown can start anytime. So stick to the basics. Here’s a simple checklist.
- Any money which is dear to you in the next five years should be in a debt product. Even the humble FD is fine for that.
- When it comes to equity investing, always diversify. Stick to Mutual Funds. (Only Direct Mutual Funds. And if you don’t believe in Fund Managers, take up Index Fund investing.)
- Don’t stop your SIPs. If the markets do correct, or if a full blown financial recession does occur, an SIP will bear even better results in the long run.
- Always stay well insured. Pick up a term life insurance policy and a good health insurance policy.
There are zero guarantees in equity investing in the short term. But over a long run, equities always provide inflation beating returns. Take a look at the chart in this post to see a comparison of past returns from various asset classes.