Is A Recession on the Way?
It seems that every day we are bombarded with talk of an impending economic recession. Some analysts have been sounding the recession alarm since the beginning of the year, while other experts feel that a pullback is still far off in the distance. A recent poll showed that 60% of Americans believe that a recession will occur in the next 12 months.1 Regardless of where you fall on that spectrum, there is no denying that it is a topic worth exploring further.
There are many economic indicators that seem to be pointing to an impending recession. Ongoing trade disputes with China have slowed corporate earnings growth and slashed capital expenditures and investments. Declining U.S. manufacturing numbers, existing home sales, and consumer sentiment also paint a relatively bleak picture. Lastly, an inverted yield curve, which has historically signified that investors are wary of short-term economic conditions, and a rate cut by the Federal Reserve indicate some apprehension about short-term market conditions.
However, for every negative metric, there seems to be a corresponding positive one. Domestic GDP is still climbing at a steady rate and unemployment sits near 50-year lows. Overall stock market performance has exceeded even the most bullish projections year-to-date. And while an inverted yield curve nearly always projects a recession (There have been five inversions since 1978, each followed by a recession), this time it may be different. The drop in the 10-year Treasury yield, a major culprit of the inversion, may be more reflective of money pouring into the U.S. Treasury market from foreign investment rather than poor economic conditions in the U.S.
Historically the ensuing recessions have occurred an average of 22 months after the initial inversion. In that stretch, the S&P 500 has averaged returns of 15%. 2
It seems fair to assume that a recession sometime in the next handful of years is highly likely, but perhaps not anytime soon. Recessions are a normal part of the business cycle. However, it is not wise to believe that the negative factors cited will not weigh on the market to some extent. For that reason, we are choosing to slightly downshift stock market exposure and add a defensive tilt to most portfolios. While no one is certain when the next recession will hit or what it will look like, rest assured that we are closely monitoring the signals and acting accordingly.
[1] https://www.washingtonpost.com/politics/six-in-10-americans-expect-a-recession-and-higher-prices-as- trumps-approval-rating-slips-washington-post-abc-news-poll-finds/2019/09/10/d99f3408-d2d7-11e9-ab26- e6dbebac45d3_story.html
[2] https://investorplace.com/2019/08/the-yield-curve-officially-inverts
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