What a difference a few weeks makes! The main news on my radar is the yield curve, which has normalized for the first time in two years. This is important because it is, historically, the last signal we get before a recession. Interestingly, in its wake, markets have begun to falter. Of course, it is always difficult to tell if any selloff will be short lived or indicative of a longer trend, but in my view now is the time to adjust your portfolio to deal with a possible recession.
Here are some of the recessionary signals I have seen triggered:
Yield Curve: Historically, when you get paid more to tie up your money for 3 months than for 10 years, something is wrong. When that relationship normalizes (you are getting paid more for 10 year debt than 3-month debt), a recession is typically not far behind.
Unemployment: While the headline unemployment rate is not a very good picture of actual employment in the US, the trend is what matters. When the headline unemployment rate rises above its 12-month moving average, we tend to see a recession not far behind.
Fed Rate Cuts: After the Fed raises rates signficantly, rate cuts tend to be indicative of a storm brewing on the horizon. This is usually because the Federal Reserve sees the economy getting and takes steps to get ahead of it. However, the Fed never admits a recession is about to happen, you can only watch their actions. The recent rate cuts fall firmly in the “recessionary” category.
Manufacturing: US manufacturing has been in contraction for over two years. While this represents a minority of the economy, it tends to indicate that all is not well. We get more data on manufacturing in the week ahead.
Index of Leading Economic Indicators: This index is a combination of several indices together. Historically, it tends to peak and then decline. Currently, we have had the longest and deepest decline on record with no recession. Given everything else, however, it makes sense that we may now be on the precipice.
Bankruptcies: Bankruptcies have increased by about 40% over this time last year — a substantial figure! It is not much of a jump to assume that there is some stress in the economy with such a rise in bankruptcies.
I have always said that, while we may not know when the first drop of rain will fall, we can generally see if there is a storm on the horizon. I now see that storm. Taking precautiouns against it might make sense. Though, exactly what that means for you and your goals is very personal, and something we should discuss.
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