Top Economist Says Markets Are Flashing Signs of Recession

What happened

Well-known economist David Rosenberg says there are already signs we're entering a recession. A recession is a prolonged period of economic downturn, often indicated by two consecutive quarters of negative growth. It often involves increased unemployment, a contraction in manufacturing and other industrial production.

Rosenberg tweeted on Thursday, "The question always comes -- why isn’t the S&P 500 signaling a recession? Answer: it is." According to Rosenberg, the most economically sensitive areas, such as transport, discretionary spending, and banks, are already down. This, he argues, reflects patterns from previous economic downturns.

So what

Financial experts have been warning about an impending recession for some time. So much so that many individuals and businesses have already done a lot to ensure they're prepared. Geopolitical uncertainty, the recent banking crisis, inflation, and high interest rates all play a role. Nonetheless, if you're an investor, Rosenberg, along with other economists, warn that the value of your portfolios may fall even further.

Now what

One of the challenging things about this much-anticipated recession is that some economists argue it won't even happen. They point to the strong labor market and relatively low levels of consumer debt, and say the economy is more resilient than we may think.

That said, many of the steps you might take to prepare for a recession will stand you in good stead whatever happens to the economy. For example, an emergency fund with enough cash to cover three to six months' worth of living expenses can guard against a host of unexpected events. Even if you put a small amount each week into a savings account, it will give you a cushion against life's curveballs.

In terms of your investments, it can be tempting to sell your stocks on the back of warnings from experts like Rosenberg. The trouble is that panic investment decisions rarely work out well. We don't know for sure whether the market will drop, nor when it will happen. If you sell now and prices go up, you won't benefit from the recovery.

Here are three useful pieces of advice for investors in a recession:

• Focus on the long term: Historically, the stock market has always recovered and gone on to reach new highs. Research assets with strong fundamentals that you believe will perform well over time, and aim to hold them for five to 10 years or more.
• Consider dollar-cost averaging: Dollar-cost averaging involves investing a set amount of money at regular intervals. For example, you might invest $200 on a set date each month. It takes away some of the hesitation to buy stocks when economists are warning of impending doom, and can also mitigate some of the risk.
• Diversify your portfolio: Diversification means buying a mix of assets in a mix of sectors, so you're not overly reliant on any one thing. That might mean buying index funds or ETFs rather than individual stocks. It can also involve including real estate, commodities, and alternative asset classes in your portfolio.