Hong Kong slid into a recession in the 3rd quarter of 2019, according to the government’s advance estimates. The city’s economy shrank 3.2% from the 2nd quarter, while the 2nd quarter slowed -0.5% from the prior quarter. (A recession is defined by two quarters of negative growth.) What’s to blame? The U.S./China Trade War and the Hong Kong protests, according to Reuters. However, in real terms, the decline was sparked by consumers. Instead of spending, Hong Kong citizens were protesting in targeted malls and other areas of commerce. Tourists steered clear of the tension. Shopkeepers lost sales, as did restaurants and any industry or service that is reliant upon tourism spending.
China’s economic growth is still faster than the rest of the world, at 3.9% sequentially in the 3rd quarter of 2019 and 6.0% annualized. However, that is down from the astonishing pace that the country has maintained for most of the New Millennium.
The U.S. economy slowed to 1.9% in the 3rd quarter, according to advance estimates. The 2019 GDP growth is forecast to come in at 2.2%. In stark contrast to Hong Kong, the U.S. consumer is one of the bright spots of the economy. Personal Consumption Expenditure makes up 62% of the U.S. economy. The increase in August PCE was largely due to car buying and medical care. So, the Hong Kong protests are a stark reminder of the price of political unrest, and just how quickly things can escalate and change. Read my interview with Nobel Prize winning economist Robert Shiller for details on how we can talk ourselves into a recession – or strike ourselves there, as is happening in Hong Kong.
Will the Hong Kong Recession Spill Over Into the Rest of the World?
The trade war between China and the U.S. has already caused damage to both economies. Companies like General Motors, General Electric and Ford are reporting lower sales and earnings in 2019, and robust cutbacks on their capital expenditures to improve performance. In the 3rd quarter 2019 earnings call on October 29, 2019, GM CEO Mary Barra’s tone was one of resignation that the challenges and costs are here to stay. Barra said, “The team continues to focus on accelerating cost reduction initiatives to improve performance, given the business environment.” In Federal Reserve Board Chair Jerome Powell’s testimony to Congress on November 13, 2019, he noted that “weakness in business investment… is being restrained by sluggish growth abroad and trade developments.”
Protecting Yourself from a Global Economic Slowdown
Your best protection is to have enough safe in your savings and retirement plans, and to know what’s safe in a world where Ford bonds were just downgraded to junk and over 50% of corporate bonds are at the lowest rung, just above junk bond status. The Cliff Notes on that are that bonds won’t save the day in the next recession. In fact, they might cause it. According to Charles Schwab’s Chief Investment Strategist Liz Ann Sonders, “This highly indebted, weak component of the corporate sphere will mark the end of this cycle in some way.”
Another important consideration is that money market funds now have redemption gates and liquidity fees. Many Certificates of Deposit are no longer FDIC-insured. Annuities and life insurance were never FDIC-insured. So, you must read the fine-print on all of your bank, retirement and brokerage products.
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Knowing what you own and why you own it is important to do now before the global economies weaken further. If you wait for the headlines that the economy is in trouble, it will be too late to protect yourself. General Electric gave no warning before they cut their dividend in half, and their stock dropped by more than 2/3rds. The warnings that Ford bonds were in danger of being downgraded to junk status were fleeting and few. (Click to access my warning in 2018.) If your financial plan is longer than just a few pages, or if you lost more than 30% in the Great Recession, these are red flags. However, even a formerly resilient plan could be vulnerable due to the over-leverage in bonds.
Underweight Hong Kong
Given the recession in Hong Kong, it’s a sound policy to underweight your exposure there. The iShares Hong Kong ETF EWH is still trading near an all-time high, so now might be an excellent time to consider a different choice.
About Natalie Pace
Natalie Wynne Pace is an Advocate for Sustainability, Financial Literacy & Women's Empowerment. She is the co-creator of the Earth Gratitude Project and the author of the Amazon bestsellers The Gratitude Game, The ABCs of Money and Put Your Money Where Your Heart Is (aka You Vs. Wall Street in paperback). She has been ranked as a No. 1 stock picker, above over 835 A-list pundits, by an independent tracking agency (TipsTraders). Her easy as a pie chart nest egg strategies earned gains during the last two recessions and have outperformed the bull markets in between. The ABCs of Money remained at or near the #1 Investing Basics e-book on Amazon for over 3 years (in its vertical), with over 120,000 downloads and a mean 5-star ranking. The 2nd edition of The ABCs of Money was released in 2018.
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Please note: Natalie Pace does not act or operate like a broker. She reports on financial news, and is one of the most trusted sources of financial literacy, education and forensic analysis in the world. Natalie Pace educates and informs individual investors to give investors a competitive edge in their personal decision-making. Any publicly traded companies or funds mentioned by Natalie Pace are not intended to be buy or sell recommendations.
ALWAYS do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies. Investors should NOT be all in on any asset class or individual stocks. Your retirement plan should reflect a diversified strategy, which has been designed with the assistance of a financial professional who is familiar with your goals, risk tolerance, tax needs and more. The "trading" portion of your portfolio should be a very small part of your investment strategy, and the amount of money you invest into individual companies should never be greater than your experience, wisdom, knowledge and patience.
Information has been obtained from sources believed to be reliable however NataliePace.com does not warrant its completeness or accuracy. Opinions constitute our judgment as of the date of this publication and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.
Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She blogs on Huffington Post and Medium, and is a frequent guest contributor to national news shows and magazines. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.