It’s 2020 and talks of recession have been in many investors' minds over the last several months. Our economy faces a lot of headwinds. We see political challenges, impeachment talks, trade deals, unrest in the middle east. Then there is the coronavirus threatening to inflict damage to one of the largest economy's in the world, China.
In May of 2019, we saw the yield curve inverted which is historically an indicator of an imminent recession within the next 1-2 years.
What is an inverted yield curve?
To put it simply, an inverted yield curve means short term US Treasuries have a higher yield than long term ones. Why is this concerning for economists? Because it means the market is more confident in the short term outlook of the economy than the long term. Given all of the headwinds we just spoke of, it is really no wonder. An inverted yield curve has preceded the last 7 recessions with an average length of 22 months from the point where the inverted yield curve is first observed.
But is it possible this time is different?
It is certainly possible. There have been multiple explanations for why this negative yield curve could be different than in the past. First, we are already in unprecedented territory. We are currently in the longest running bull run in the history of the stock market at over 10 years running. Combine that with perhaps the most unprecedented and unpredictable political environment we are in, and it certainly feels like anything is possible.
Another reason why the inverted yield curve might not mean a recession is because of Japan. Japan recently introduced negative interest rates on their long term bonds. That might very well have caused an influx in long term investors for the US bond market which would drop the yield.
What does all of this mean?
In just a few paragraphs we’ve laid out some reasons why a recession may be imminent, and why that may also be false. In fact, if you were to look up articles by other experts in the field, you will find any number of opinions on whether a recession is right around the corner. If you are optimistic, you will easily find industry experts who agree with you. If you are pessimistic, you can also find many industry experts who agree with you.
Bottom line? No one knows for sure. And that can be scary, but only if you allow it to scare you.
So how should I invest?
We are big believers in controlling the things we can control. We can control our behavior. We can control our spending habits. We can control our savings habits. We cannot control the market! At Summit, we tend to focus more on these things while intentionally managing risk and exposure to potential market downturns.
The bottom line is, there will always be economic expansion and pullback. We need to remember that a well-built financial plan that is focused on your specific goals should take market downturns into account. That is good news for you. You don’t need to pay much attention to the daily movements of the market. If you've trusted a competent professional with your portfolio, your financial plan includes a plan to navigate through potential pullbacks, market corrections, and recessions.
It is similar to setting out on a road trip and worrying about potential storms you might face on your drive. Certainly storms are concerning, and they definitely present challenges as you drive towards your destination. But there are steps you should put into place to weather the storms and come out okay on the other side.
It is nice to see our 401(k)s performing well, but long-term performance requires commitment to stay the course through the tough times as well. What matters is your behavior and your mindset, because ultimately, strong short-term investment performance won’t last forever.
What leads to fulfillment is accomplishing your goals and reaching your summits. That can be done by clearly defining your path and putting together a plan to reach your goals, regardless of market conditions.