Can We Forecast a Recession? Here is What We Watch For.
Are there indicators you can watch for to help determine when a recession is on the horizon? Turns our there are! We follow over 20 different indicators, but here are three of them.
Yield Curve
In a normal environment, you get paid more to tie up your money for more time. However, before a recession, that relationship tends to become skewed, and you get paid more to tie up your money for three months than you do for 10 years.
Typically, after that inversion, a recession is not too far behind.
As you can see from the chart, we currently have the longest and deepest inversion on record.
Index of Leading Economic Indicators
Another indicator we follow to help us forecast recessions is the Index of Leading Economic Indicators. This is actually several indicators collected into one. As you can see, it tends to peak and then fall as a recession approaches.
Currently, this index has fallen for the longest amount of time on record without a recession.
Unemployment Rate
While the unemployment rate may not be a great indicator of how many people are actually employed, using it as a recession indicator works pretty well. When the unemployment rate moves above its the average rate over the last 12 months, it tends to keep climbing, due to a recession.
As you can see, the unemployment rate has moved above its 12-month average and has been climbing.
Overall, there are several indicators people watch for to help them guage the economic cycle.
Of course, exactly how this information affects you and your portoflio is entirely unique to you and your goals. Your goals may allow you to weather losses better than someone who is within a few years of retirement, for example. That’s why we are offering a free risk assessment to help you.
Ultimately, though, there is little downside to understanding the signals indicating a recession is on the horizon, and these three indicators are a good place to start.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.