No, the sky isn’t falling; it’s simply a possible U.S. recession for 2020, maybe even 2019.
You’ve likely seen the news already: multiple media outlets are reporting the U.S. economy (and other parts of the global economy) is showing signs of a looming downturn in 2019 that may extend into early 2020.
And yet, we all know the saying when it comes to news: if it bleeds, it leads. If the stock market continued its thriving ways as the past few years indicate, there would be little to no reporting on its health. A bull market is a footnote, but a bear market is the featured headline.
There are a number of questions to consider as we look at what may be the next U.S. economic recession:
- What is a flattening yield curve, and does that mean we’re headed into a recession?
- What may be other signs of an economic recession?
- Is the U.S. going to have a recession in 2019?
- If we do have a recession in 2019, how long do we expect the recession to last?
- And most importantly, how do you successfully navigate the 2019 recession as an investor?
While this is not a comprehensive list, and we’re certainly not predicting a recession, there is growing concern about market volatility for the coming months and years. This article is designed to answer these questions in detail so you can have greater confidence and know what some of your options may be for growing your wealth in 2019 and beyond.
No matter if a recession occurs in 2019 or sometime in the near future, these are evidence-based principles and good common sense questions and perspectives that can help guide your investing future.
What Is A Flattening Yield Curve, and Does That Mean We’re Headed Into a Recession?
There are a number of potential markers that may be indicative of a recession in a variety of economies. A popular term among investors and financial experts over the past year is “flattening yield curve”. What does “flattening yield curve” even mean? Again, our job at Full Circle Financial of Colorado is to explain the technical terms of our industry so you can know with certainty what we mean we use specific terms.
To better understand “flattening yield curve”, we need to consider two different interest rates: short-term interest rates for bonds, and long-term interest rates for bonds. If you had two bonds with the same quality, referred to as “credit quality”, you would want to know if it’s more profitable to hold onto the bonds for a shorter period of time or a longer period of time.
If you as the investor knew you could cash in one bond sooner than the other for a more profitable return, you would probably be inclined to cash in the bond. However, if the other bond was more profitable with a long-term interest rate than the bond with the short-term interest rate, you would obviously be inclined to wait longer before cashing in the long-term bond.
The difference between those two interest rates for bonds, short-term and long-term rates, is what we call a “yield curve”. As the yield or return on investments for bonds with short-term interest rates gets closer to the yield of bonds with long-term interest, it causes the difference, the ‘curve’ as it were, to flatten in appearance. In many cases, an economic recession is often not far behind the change in bond interest rates.
When the yield for short-term bonds becomes greater than the yield for long-term bonds, it actually causes what’s called an inverted yield curve. As Simon Moore shared in a June 2018 article on Forbes, “Interestingly, the yield curve inverted in 1998, 2000 and 2005. In each case, a U.S. recession occurred within 1 to 3 years. That’s an impressive forecasting record.” (Forbes, June 2018) In Q4 2018 the two-year and 10-year yield curve inverted by roughly 10bps. The rest of the yield curve based on other durations remained positive.
Our approach at Full Circle Financial of Colorado is considering multiple pieces of evidence, not just one marker, that may indicate market activity. A flattening yield curve, and certainly an inverted yield curve, could be a reliable sign of a coming bear market, but what other signs are worth considering?
What May be Other Signs of an Economic Recession?
Flattening yield curve may be the most technical marker we’ll share that may be a sign of a coming recession. There are three other markers, among others, of a possible recession that are easier to identify and track as an investor.
- U.S. Investor and Market Sentiment
“Are we heading into a recession?” “Well, my neighbor seems to think so. He’s the President of Such-and-Such Bank.”
If this conversation sounds familiar, then you’re already seeing a classic example of consumer and business sentiment influencing how investors see the market. Using our example, your friend’s neighbor who is a president of a bank is already believing an economic downturn, if not a full recession, is on its way. That belief is likely guiding many of the business decisions he is making as president of the bank, including changes to policies and practices involving interest rates, loans, and underwriting for consumers and businesses.
The idea of an economic recession being just around the corner is as contagious as a virus. A simple conversation between bank presidents can ‘sneeze’ this virus from one location to the next. When hard evidence is replaced with consumer and business sentiment is when the possibility of a recession quickly becomes our reality.
- Global Market Volatility
In case you haven’t heard, the U.S. and China are not playing nice when it comes to trade negotiations. The U.S. imposed trade tariffs on over $250B of Chinese products with the threat of tariffs on an additional $267B. (China Briefing, August 2018) In retaliation, China imposed tariffs on over $110B of U.S. products and the possibility of limiting U.S. businesses from operating in China.
As of mid-February, trade talks between these two global titans are tense but cautiously optimistic as recent conversations show promising results. Trade tariffs between two countries as influential as the U.S. and China create a trickle-down effect on smaller international markets. This further increases global market volatility and can slow global market growth, it means a greater likelihood the U.S. economy may experience a recession.
- Gross Domestic Product (GDP)
There are other markers that can often be signs of a looming U.S. recession: changes in unemployment rates, median income levels, and private business sales, among others. Arguably, one of the most influential numbers for economic activity is what we call the Gross Domestic Product or GDP as it’s often referred to in economic conversations.
Imagine we added up the total value of all the products, goods, and services produced in the U.S. in a given year. That would be the Gross Domestic Product. For the U.S., the GDP for 2018 Q3 was 3.4% growth rate, but the growth rate for the 2018 Q4 GDP is projected to range from 2.5-2.7%, almost a full percentage point lower than Q3. (Seeking Alpha, January 2019) Early projections for the U.S. GDP in 2019 Q1 are expecting more slowdown to the estimated mark of ~2.1%.
If a U.S. Recession Happens In 2019, How Long Is It Expected to Last?
To date, there have been 47 documented recessions in the history of the U.S. While the average span of time between recessions is approximately four years, this span continues to grow since the 1980s. The most recent U.S. recession was officially recognized as over in June 2009, even though actual economic recovery took several years to recover from the second-worst economic recession in U.S. history. The amount of time between the three most recent U.S. recessions lasted an average of almost eight years. (NAI Benchmark, Feb. 2019)
As we approach almost ten years since the last recession, it’s understandable why we’re seeing signs now of another recession. However, one sentiment that seems consistent is that if we do experience a recession in 2019 or 2020, it’s certainly not expected to be nearly as devastating as the Great Recession of 2007-2009.
The average U.S. recession tends to last around nine months in duration. The length of time for the three most recent U.S. recessions lasted an average of eleven months, but it’s worth noting the 2007-2009 recession lasted twice as long as the previous two recessions due to the significant collapse of the housing market.
How Do I Successfully Navigate the 2019 Recession as an Investor?
Again, we need to acknowledge there’s still a good possibility we’ll avoid a recession in 2019. Whether it happens in 2019, 2020, or any other time in the near future, how do you as an investor make the most of this opportunity?
It starts with having confidence in your long-term written financial plan. This can ground your perspective as an investor beyond the daily headline or the rollercoaster experiences on the stock market each month. One of the best investments you can make as an investor is spending the time to create a written financial plan.
When the U.S. experiences market volatility, it can be good to consider shorter-duration investment types, such as bonds, mortgage-based funding types, and cash-driven assets. We highly encourage you to consider your risk tolerance and talk with your investment advisor on how to find the right funding types to fit your risk tolerance and written financial plan that may be more reliable and conservative in nature.
Every investment opportunity is unique, as is your set of financial goals, so be true to yourself and what you want to accomplish long-term instead of letting market volatility sway your investment decisions. If you want a financial advisor who can help you identify a steady, focused approach towards investing, that’s where our team at Full Circle Financial of Colorado is here for you.
If you’re ready to talk, give us a call to share any concerns and questions you may have about the economy. We commit to giving a no-judgment, zero-fear approach in providing you with the best information to address your concerns. You may not be ready to talk yet, and that’s okay. If you like this article and want to learn more, just send us a message to start a conversation. No calls necessary, just a message or two so you can get to know us a bit more before taking that first step.
No matter what happens with the U.S. economy, we want to be here for you every step of the way. Thank you for taking the time to learn more from us.
Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Cambridge and Full Circle Financial of Colorado, Inc. are not affiliated. Diversification and asset allocation strategies do not assure profit or protect against loss. Past performance is no guarantee of future results. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal.