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The economy is slowing. Worried about recession? Here’s what to do with your investments

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My late friend, neighbor and former mayor of Boise, Bob Day, used to tell me, “Mark, you and I are fine; it’s the rest of the world gone mad.” And one might think the world has gone mad based on the month of August just ended. The dog days of summer have given way to a full-blown kennel fight.

Our president compared U.S. Fed Chairman Jerome Powell to China’s Premier Xi. The so-called yield curve inverted for the first time in seven years — and by some accounts, that is an accurate predictor of recession. More ink spilled from financial media falling all over themselves to predict the next economic recession.

The big issue for central banks and sovereign governments around the world is the lingering deflationary pressures that remain since the Great Recession. Extraordinary monetary stimulus and extremely low interest rates have not solved the structural fiscal problems of high taxes, excess regulation, generous social policies, and massive spending by world governments. Consumers, some 70% of the U.S. economy, may postpone consumption and major goods purchases if they believe prices will be lower tomorrow. That’s bad for business and for getting re-elected.

But before we all go off the deep end, let’s take a collective deep breath and think this through rationally.

The yield curve is not your safe bonds and cash invested for low risk and available for immediate spending.

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Mark Daly

The stock market is not a predictor of economic recession. It is the growth engine that prevents erosion of purchasing power during retirement.

Consider a rebalance of your portfolio into more equities on days like Friday, Aug. 23, when the Dow dropped over 600 points, then rebounded some 230 points on Monday Aug. 26. Research shows this behavior may increase annual returns up to 1% per year in a basic 60/40 stock bond portfolio. That significant extra compounding over a 10, 15 or 20 year retirement can help your portfolio grow.

Focus on dividends as a primary source of income during periods of low interest rates. A large national commercial bank recently raised its dividend from $0.45 to $0.51 per quarter, more than a 13% increase. You won’t find that kind of increase in a savings product.

August through October can be difficult months for stock prices, especially after this year’s eye-popping gains through midyear. Do not change course in response to normal corrections of 5%, 10% or 15% during the calendar year. Stocks end the year higher three-fourths of the time. Remember the Christmas Eve massacre last Dec. 24, followed by the Boxing Day miracle on Dec. 26?

The third year of a presidential term is typically positive for stocks as politicians and Congress juice the economy with higher spending and increased social payments. The U.S. and other developed economies are slowing but remain strong by many measures. Recessions happen in a free economy. Cleansed of excesses created during the boom, recessions end and usually set the table for another up leg.

Bob Day served one term as mayor from 1959 to 1961. He taught me the value of land, public equities and patience. He knew the madness would continue as long as humans were involved, subject to emotional decisions and swayed by hype.

We need not succumb. Embrace careful planning and emotional control, while avoiding risks resulting from financial mistakes made by so many.

Mark Daly is an investment management analyst and a partner in The Perpetua Group in Boise.

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