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Recession Talk

Whenever you talk about recessions, it’s important not to be alarmist. Because it is very hard to time a recession (that is, know precisely when it will begin and end), and because it is even harder to know when the stock market will decline and rise again in association with a recession, it is generally best to simply ride out these periodic downturns with a consistent asset allocation. After all, in every circumstance so far, the economy and the markets have eventually recovered to post new highs. Nobody is guaranteeing that, of course, but so far the track record has been good.

Nobody would be surprised to see the U.S. fall into an economic recession sometime in the next 18 months. A recent article in Forbes magazine laid out the clouds that economists are watching on the near horizon.

The biggest of these is an unusual slowdown in global trade these past two years. Indeed, trade growth has been essentially zero this year, and the Forbes article points directly to the trade wars between the U.S. and China, between the U.S. and Europe—and doesn’t specifically mention another significant trade war brewing between South Korea and Japan. At the same time, the Trump administration has been “interfering” [the magazine’s term] with the global currency markets, changing the rules to make it easier to label a country a currency manipulator at the same time the President has been demanding that the U.S. Fed cut interest rates to weaken the dollar and make U.S. exports more competitive. Global companies are no longer sure who they can invest in or where, and so they have held back on capital investments until the uncertainty passes—and when will that be?

At the same time, the article notes, periods of uncertainty tend to bring nervous capital rushing to the relative stability of the American currency, driving up the value of the dollar and making American exports less competitive on the world markets. U.S. corporate profits declined consecutively in the first two quarters of this year, including an alarming decline of 2.8% in the second quarter, according to statistics compiled by the Bloomberg organization. Small companies, which tend to carry more debt than large ones, appears to be faring worse.

And then there’s the yield curve. There was a very brief inversion of the curve several months ago which triggered headlines, but you don’t hear many people talking about the strange upside-down nature of the bond market today. At this moment, you can get paid more for investing in 3-month Treasuries (1.98% yield), than you can if you take more risk and go out six months (1.86%), and you get still less at 12 months (1.72%), 2-year (1.49%) and 5-year Treasury bonds (1.36%). That suggests that bond investors are trying to lock in very low rates for longer periods of time, a sign that they’re unsettled about the future of the economy.

None of this means that a recession is inevitable, of course. According to the Journal of Accountancy, Americans’ personal satisfaction levels are near their all-time highs (according to the AICPA’s Personal Satisfaction Index), and the most recent Business & Industry Economic Outlook Survey shows that U.S. business leaders are more confident about the domestic economy than the global economy. But the fact that one of America’s leading business magazines is uttering the dreaded “R” word to its readers suggests that it is never a bad idea to make sure you’re comfortable with your current asset allocation, and willing to weather a market storm whenever it may come.

Please Note: This article is used with permission from a newsletter to which KFG subscribes. It is for our clients only and may not be republished.

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