03. Economic risk

What is Economic risk?

The risk that an overall downturn in the economy will result in lower sales and profits (and consequently lower stock prices) for the corporations you invested in.

How this risk plays out in the real world

Oct 18, 2017: U.S. economy grows modestly in September through early October
Jul 28, 2017: U.S. economy accelerated during first full Trump quarter
Sep 15, 2016: Street economists cut Q3 GDP estimates after retail sales miss
Jun 06, 2016: The recovery just turned 7, and here’s why it feels so weak
Sep 15, 2015: Morning MoneyBeat: The U.S. Appears Headed for an Earnings Recession
Oct 12, 2014: Global Signs of Slowdown Ripple Across Markets, Vex Policy Makers
Aug 28, 2014: US economic growth outpaces government estimates
Jan 31, 2014: Five newly-released numbers to help you gauge how the US economy is doing
Oct 22, 2013: Why Bad News On Economy Was Good For Stocks

Connection to other risks

This risk relates to Market risk in that both can move the stock market to drop. But, if the market is falling because there is a recession, it can stay down for an extended period of time as investors become reluctant to bid stock prices higher until they begin to see the eventual end of the recession.

How investors can manage Economic risk

  1. As a recession approaches, invest in so-called “defensive” stocks such as makers of necessities like tooth paste and laundry detergent or utility companies which supply our homes with electricity and natural gas.
  2. Instead of defending, go on offense. Invest in “counter cyclical” corporations that should do well during difficult times. These include pawn shops, dollar stores, collection agencies, and liquor makers.
  3. Put protective “sell stops” orders in place so that your stocks will automatically sell if they drop to a level representing the maximum loss you are willing to suffer.

A final word

The Great Recession that was caused by the inflating and popping of the housing credit bubble began in 2007 was declared officially over by the middle of 2009. The stock market downturn was severe, with stocks losing more than half their value from the peaks they reached in 2007. Even though economic growth and job creation were anemic in the subsequent decade, the stock market has soared from the lows of 2009.