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
Sep 10, 2019; Retail credit cards are squeezing the financially vulnerable as their delinquency rate rises
Dec 13, 2018: US auto sales are expected to drop below 17 million for first time since 2014
Nov 19, 2018: Homebuilder confidence plummets to the lowest level in more than two years as ‘demand stalls’
Jul 28, 2018: U.S. economy accelerates to 4.1% rate in second quarter, fastest in almost 4 years
May 10, 2018: Student loan delinquencies increase
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
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
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
- Monitor the state of the economy by keeping yourself up to date with what important economic indicators are showing. The rate at which economic output, called Gross Domestic Product (GDP), is growing is the most important indicator. Others include the unemployment rate, the rate at which wages are growing, the inflation rate, housing starts and the amount that consumers are in debt (ie, consumer credit).
- If you are confident a recession is approaching, 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.
- Put protective “sell stops” orders in place so that your stocks will automatically sell if they drop to a level representing the maximum decline 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 for much of the subsequent decade, the stock market soared from the lows of 2009.