💸 A Gen Z’s guide to preparing for a recession

🥴 A recession freakout

Economic pundits and the stock market have been freaking out lately and no, it’s not over a certain kaya toast chain raising its prices (again).

First, there was the great unwind last month 🧵 that briefly sent stock and currency markets in a meltdown after a rise in the Japanese yen and sell-off in tech stocks.

Then came a drip-feeding of warnings about a potential US recession – and we all know the common adage that when the US sneezes, the world catches a cold, given how connected the US economy is to the world.

To be clear, Singapore is not expected to go into recession anytime soon, with economists upping their growth forecasts for the year to 2.6 per cent despite worries of a slowdown in other countries.

But over in the US, much of the recent worry has been related to the disappointing jobs report which showed the labour market slowing faster than expected.

Many analysts pointed to the “Sahm Rule” being triggered 🔮, which indicates that the US is already in a recession based on unemployment data. (Official recession announcements are usually made only after an economy has already entered one.)

This rule has accurately predicted every US recession since the 1970s, though its creator Claudia Sahm has said she isn’t convinced the US is currently in a recession.

Economists have also been looking at another indicator that’s a bit more… meaty 🌭: Sales of dinner sausages at one manufacturer in the US have been growing, which the seller said tends to happen when the economy weakens.

The reason? Sausages are a more affordable form of protein that people buy to stretch their budgets.

And with the US Federal Reserve set to announce an interest rate cut next week, it won’t be surprising to see more turbulence in the markets.

⚖️ What’s a recession?

Recession calls happen all the time. Everybody wants to be that guy that made the right prediction and sold their stocks off at their peak.

The truth is that recessions are notoriously difficult to predict and economists have a long history of making wrong guesses. As the joke goes, economists have predicted nine of the last five recessions.

But first, how is a recession defined? The general consensus is that it’s when a country experiences two consecutive quarters of economic contraction. That’s often referred to a technical recession.

In the US, a recession is official only when a group of eight economists working in a private non-profit organisation known as the National Bureau of Economic Research says so. They look at other factors beyond gross domestic product (GDP), including employment, income, retail sales and industrial production.

In a recession, stock prices can fall quickly and take a long time to recover as companies struggle to sustain profitability.

Retrenchments happen, unemployment rises and those out of a job take a longer time to find work. For those lucky enough to hold onto their jobs, their pay stagnates or worse – gets cut.

During the Covid-19 pandemic, which triggered recessions around the world, the S&P 500 index – a benchmark for the US stock market – fell by around 34 per cent. In Singapore, the number of employed people fell by a cumulative 196,400.

📋 What to do in a recession

💰 Your investments

There are two broad ways to approach investing when a recession is imminent. The first is to take active steps to protect your investments from a sell-off. The second is to not do anything about it, which can be harder and wiser than it sounds.

If you’re convinced a recession is about to hit, you could shift your investments into safer assets, especially if you need liquidity soon.

Some may choose to sell their higher-risk stocks or high-yield bonds for more conservative assets that have historically fared best during recessions. For example, treasury bills, government and investment-grade corporate bonds, gold (which has already been on a tear this year), or plain-old cash.

Those still wanting to hold onto stocks may shift their holdings to defensive sectors such as healthcare, utility or consumer staples, which tend to be more insulated.

Experts also generally recommend avoiding companies with high debt as they may have trouble paying their loans when the economy is bad.

The alternative is not to panic and continue investing as you usually would.

Given how difficult it is to predict a recession, selling your investments in anticipation of recession can be risky: you could end up selling prematurely and get trapped in cash as markets continue to rise. Worse if the market has already fallen when you start to sell, and you miss out on its recovery.

If you already have a long-term investment plan and a well-diversified portfolio, continuing to make scheduled investments through the ups and downs of the market has more often than not been a better strategy than trying to time the market.

💼 Your career

Whether or not you’re in a more secure industry, having valuable skills will make it harder for your employer to justify cutting your job. In your free time, use your SkillsFuture credits so even if you get cut, you’ll be more attractive to a future employer.

Keep your resume updated to give yourself a bit more confidence if you suddenly need to find a good job. Catch up with your network in case you need to tap on them for a job opportunity.

The time taken to find a job will likely become longer during a recession, so if you plan to quit before without having another one lined up, consider whether you have enough savings to tide you through such an extended period.

👝 Your finances

The same old personal finance to-dos stay true during a recession, perhaps even more so during such times.

• Emergency funds: Have about three to six months’ worth of expenses set aside. Should the economy turn bad and you lose your job, you’ll thank yourself for doing this.

• Pay off high-interest loans: Taking on a loan may make sense while you’re still employed, but this could turn into a nightmare if you lose the monthly salary that you need to pay off those debts.

• Cut down on your spending: This is especially true if you haven’t set aside an adequate emergency fund. Relook your daily/week/monthly budget and figure out how much of your spending goes to necessities and to non-essentials.

• Insurance: Make sure you’re well-protected. But also remember that the main purpose of insurance is protection, not investment, so make sure you’re not spending too much on a plan you can’t afford. If you’re relying on your company’s corporate insurance, make a plan to replace it in the event your employment is terminated, because your policies will also likely be cut.

TL;DR

• Markets have been freaking out over a potential US recession

• Though recessions have dreadful effects on jobs and investments, they’re notoriously hard to predict

• When anticipating one, consider shifting to safer assets or continue to stay invested if you can afford to

• Keep your career options open and get your personal finances in order