Gail MarksJarvis: As recession voices grow, check your exposure to stocks

McClatchy-Tribune Information Services

October 10, 2016

Recession chatter is back.

After skipping worrisome talk for a few months, a handful of respected analysts again are trash-talking the economy and flinging wet blankets at people oblivious to mounting risks.

Notable among the less-than-enthusiastic voices on the economy have been Bank of America Merrill Lynch strategist Savita Subramanian and Russ Koesterich, BlackRock head of asset allocation. In a report circulated widely on Wall Street this week, Subramanian said, "We found evidence for an imminent recession."

Meanwhile, Koesterich wrote in his blog: "Are investors underestimating the risk of a recession?" He faulted people for drifting inattentively from one day to the next without examining risks that may be mounting, potentially threatening IRAs, 401(k)s, pension funds and other investments. Tremendous stock gains over the last eight years have crowded out cash and bonds in investment portfolios and consequently may have left people defenseless against the stock market crashes that sometimes accompany recessions.

Although people are supposed to monitor their investments at least once a year to make sure their small-size portions of stocks havenít turned into big-gulp portions, Koesterich fears people have neglected the monitoring. He suggests that professional investors as well as casual savers may have been put into a state of unconsciousness by "imbibing the nectar of cheap money."

Thatís the money the Federal Reserve and its global counterparts in Europe and Japan have been spewing into the economy in the hope it would finally give a normal heartbeat to an economy thatís been in therapy since the 2009 recession. The global economy still hasnít recovered its strength, but trillions of dollars of easy money have poured into the market and lifted stocks about 270 percent since the those scary days.

Those gains probably are reassuring to people watching their wealth grow, but instead people should look at them with a wary eye. If there is a recession, stocks could go into a bear market ó a decline of 20 percent or more ó that could last several months. Such declines can be ignored by people years away from retirement.

But they can be a disaster to people close to retirement, or in retirement. As protection, financial planners typically suggest retirees invest in some stocks all the time, but hold about three years of cash so that if a bear market hits, people can cover retirement needs with cash rather than touching their stocks until they heal. In the last recession, people recovered from losses in about two years if they had portfolios invested half in the stock market and half in U.S. government bonds.

Keep in mind none of the analysts talking recession last week was predicting an immediate problem. They are merely leery after some recent U.S. economic news such as slowing job gains and continuing threats from financially weak countries abroad. In the last couple of weeks, investors have become aware once again of the fragility of the global banking system as strains in giant Deutsche Bank have reignited "too big to fail" concerns and as the British pound plunged on Brexit worries in the United Kingdom.

"There seems to be mounting hysteria about the prospects for the global economy," Edward Yardeni, of Yardeni Research, wrote to clients. Yardeni is in the camp of analysts who see neither a boom nor bust economy ó just an economy that fails to pick up the sizzle that usually comes at this stage in a recovery after a recession.

Subramanian too said she canít be sure there will be a recession, but if economic data continue "to weaken in line with the recent pace, history would point to a recession in the second half of 2017."

Also, even in a recession, Subramanian isnít promising people a bear market.

"Not every bear market coincides with a recession, but the most painful ones do," she said. Of the 13 bear markets since 1928, 10 have coincided with a recession. And there have been several recessions, including 1945, 1953, 1959 and 1980, when market declines have been less severe than the 20 percent drop that comes in a bear market.

The message now, she said, isnít to bolt from stocks, but to check stock exposure to make sure you are positioned well for any downturn. Note that stock markets typically sense recessions early and broadcast warnings through declines. The general rule of thumb: The stock market leads the economy by one to two quarters and on average peaks seven to eight months before a recession.