How Much Should You Worry About a Possible Recession?
Last week, on August 14, the Dow Jones Industrial Average fell 800 points, its biggest drop of the year. Investors were spooked by the specter of recession, and those concerns had been nudging markets downward for a while, though not as dramatically as on August 14. Markets recovered somewhat the rest of the week, but they are still skittish and well off the historic highs set earlier this year.
So are the bears beginning to wake up?
It is not clear. The arguments against a recession coming soon include:
- Companies are still profitable, and the economy is still positive. U.S. retail sales rose 0.7% in July, which was more than many experts had predicted. Since consumer spending is a primary mover of the U.S. economy, rising retail sales are a positive sign.
- Interest rates are low, which encourages people to buy homes and expand their businesses.
- Inflation is low, which means the value of money is reasonably steady.
However, many experts contend that the U.S. economic picture is becoming less rosy. They note:
- The current bull market is one of the longest in U.S. history. And if history teaches us anything, it is that things eventually change.
- Growth continues, but it is slowing in some important sectors such as manufacturing, new home starts and new car sales.
- Some yield rates are upside down. In a healthy economy, short-term interest rates – which represent yields for investors – are lower than long-term rates. That's because investors want higher yields in return for locking their money up for a longer time. On Wednesday, the yield on the 10-year Treasury bond temporarily dropped below the yield for the two-year Treasury bond for the first time since 2007. Yields on other short-term bonds have eclipsed yields on the 10-year bonds earlier in the year. The market drop reflected a concern that investors are worried about the economy short-term.
The U.S. markets so far are only flirting with the inverse yield curve described above. But in other countries, the bond market situation is more concerning. And that is concerning to us, because more than ever, the economies of nation’s all around the world are increasingly interconnected.
In January, the U.K DailyMail.com warned, "Global growth is slowing and the world economy is headed for a recession in 2019 unless something happens to give it renewed momentum." Since then we have seen political uncertainly about the European Union, as well as mounting trade tensions and tariffs between the world's two economic superpowers, the United States and China.
But there are a couple of things to consider. The first is that several times since the end of the Great Recession of 2008, economists have warned about another big recession -- that so far has not materialized. Of course, that does not mean that one could not be coming now. It just means that recession does not follow every time the markets get spooked. It also is important to think about where your money is invested now, and where else you could invest it.
The only way to protect yourself completely against recession is to put all your money in cash and lock that in a bank vault. But if you did that, you would lose the growth potential of investing in equities -- which over time since the start of the stock market have provided higher yields than any other kind of investment.
At Peachtree Investments, we agree that these are not good times to go chasing fast returns in the hot stock of the moment. But then, we don't think it is ever a good time to do that. We believe in investing for the long term in the stocks of established, dominant, well-financed U.S. companies with strong leadership and a history of paying dividends.
Of course, every situation is different. Just give us a call or send us an email if you want to talk about your own portfolio and your specific needs and concerns.
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Garry K. Schaefer
Atlanta, Georgia
August 20, 2019
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