Faster than a locomotive, able to leap tall buildings in a single bound.
That’s how one might describe the bull market that we are currently in, the second-longest on record actually. From March 2009 until today the market has risen 277% to its current lofty perch.
The longer the bull market goes though, the more people start to wonder: when will it all come crashing down? To help understand the risks investors face, we’ve looked at three events that might trigger the next recession.
- Central Banks Overplay Their Hand
A recession can occur when credit dries up. If there’s less money to borrow, or it becomes more expensive to do so, then business expansion could slow down and cause the economy to eventually contract.
Central banks play a big role in keeping that delicate balance because they control a specific interest rate, the interest rate of money that a central bank lends to other banks. When the money a bank is borrowing becomes more expensive, they tend to pass that cost on to their customers.
For the longest time the Fed, America’s central bank, kept their interest rates extremely close to zero – effectively making money incredibly cheap to borrow. As the economy recovered, their plan was to slowly increase that interest rate. They’ve done so four times now but the rate is still very low as the powers-that-be fear of overplaying their hand and short-circuiting the economy.
It may not matter what they do though. With the bull market entering its ninth year it is possible that the next interest rate hike could have an adverse effect as we pass some invisible tipping point.
- ECB Makes A Misstep
Just as the Fed can torpedo the economy through one wrong move, so can the ECB, Europe’s central bank.
If the ECB were to increase their interest rates and cause a Eurozone-wide recession than that could potentially have disastrous knock-on effects for the US. You see, Europe accounts for 20% of the United States’ $1.4 trillion export industry and having one of our best customers go on holiday could really leave the country in a pinch at such a pivotal moment.
- A Series of Bankruptcies In A Key Industry
Sometimes a recession can be triggered when an industry goes through upheaval. For example, there are a lot of retailers in the US worried about Amazon breathing down their back. If it were to get to a point where a big retailer’s market share erodes enough to cause them to default on loans then we would want to keep a close eye. A big player going bankrupt could result in a hundred thousand people being laid off. If the credit risks are systemic, then one player going bankrupt might cause lenders to call in money from other clients – would that then cause other retailers to fold as well?
Any industry that is overleveraged and employs a large number of people going through turbulence could easily cause a recession.