Is A Recession Looming? Here’s What It Means For You And Your Money

U.S. stocks are having their worst start ever to a new year, causing anxiety to spike and memories of the 2008 recession to resurface. Some pundits are speculating that the U.S. economy is heading for another downturn, but others are skeptical of that prediction.

There are certainly some worrying signs. Economic troubles in China are threatening to slow demand growth worldwide, while analysts are expecting a recession in U.S. corporate profits this earnings season, and the manufacturing sector is contracting.

Still, investors do have reason to feel optimistic. Data from the U.S. Bureau of Labor Statistics show that employment, one of the leading indicators of a recession, is still relatively strong.

Job openings held steady at 5.4 million in November 2015, 11.2 percent more than the same time last year. Wages may finally be improving as well, as companies compete to hire the best talent. The majority of employers, 83 percent, plan to increase compensation for existing employees in 2016, according to CareerBuilder’s Annual Job Forecast.

“On average, the U.S. has added 200,000 jobs each month over the last two years, and we expect 2016 to produce similar results, if not better,” said Matt Ferguson, CEO of CareerBuilder and co-author of “The Talent Equation.” “Workers are gaining leverage,” he added.

That’s good news for the average American, who is likely to associate a recession with unemployment. “They are afraid they’re going to lose their job” said Bob Milnamow, president and chief investment officer at Barrett Asset Management. "The most important thing for most people is to be employed."

Still, what goes up will eventually come down. Recessions are an important part of the economic cycle, leading to a healthier economy overall. “You need that clearing process in the same way that a forest needs the occasional fire to clear out underbrush,” said John O’Meara, a certified financial planner and owner of InnerHarbor Advisors.

“If it helps, that last recession was very abnormal,” O’Meara added. "Overwhelmingly, recessions do not cause that much damage. But it’s easier to say that to someone than to make them feel it."

Investors can channel their anxiety toward taking action, using this time to stabilize their own financial security. Given the current job market, it’s a good time to focus on performance at work, as well as keeping their LinkedIn profile up-to-date, in case new opportunities arise. Young people in particular should take a second look at their current employer to make sure their position will be sustainable in the long-term if the economy takes a turn for the worse.

“It’s best for millennials to work for companies where they have a great deal of confidence in the current or future profitability of the company," Milnamow said. "When you are working for companies that are not profitable, you’re in trouble."

When it comes to investments held in a 401(k) or IRA, it’s best to avoid selling when the market is down. “The No. 1 rule for any investor, particularly younger ones, is do not sell under pressure,” Milnamow cautioned.

O’Meara has a simple litmus test for advising nervous investors who fear a looming recession.

“If you’re going to sell now because you think it’s a recession, you have to answer two questions: When am I going to get back in if I’m right, and when am I going to get back in if I'm wrong,” he said. “If you can’t really answer that for yourself, and most people can’t, then it doesn’t make sense to trade out of a recession,” he added.

A good example of this, according to O'Meara, is the market downturn that happened in 2010. Many experts were calling for a double-dip recession, and panicked investors sold when the market had declined nearly 20 percent. "From that closing low to even where the market is now, it’s more than doubled," he said. Those who didn't have a clear plan on when to get back into the market missed out on significant gains.

In fact, O'Meara says investors are generally better off buying rather than selling during market declines. “You should be taking this time to make sure you are keeping the right amount of risk in your portfolio, not eliminating it,” he said.

Paying down debt and adding to an emergency savings account is also a wise move. If a recession does hit, or a period of unemployment is unavoidable, it’s important to be able to continue to afford rent and basic living expenses.

“The things you should be doing are the things you should be doing all the time,” O’Meara said. “But if you’re worried about [a recession], maybe it’s a good impetus to do it,” he said.