Get prepared, because it looks as though some form of economic downturn is brewing, and the markets could start suffering impacts later this year.
Of course, we’ve been sounding the alarm for quite some time, but now it also appears that mainstream strategists are catching on.
In fact, one senior financial advisor recently went on the record with a pretty grim forecast:
The latest U.S. economic data suggests a recession is coming, according to the chief executive of financial advisory firm Longview Economics, and investors may need to prepare for some pain in the stock market.
…Chris Watling said he believed a recession was on its way, citing what he described as “pretty compelling” and “brutally bad” leading economic indicators."
The article continued: “Watling said the typical timeline for a recession after the inversion of the Treasury yield curve, which first inverted in March 2022, then again in the following months, was roughly one year or so.”
The inversion of two and 10-year Treasury bond yields is a reliable indicator of a recession, because it signals that the market’s longer term prospects are better than the near term. It’s counterintuitive; when taking out a mortgage to finance a home, you’d always expect a higher interest rate associated with a longer-term loan, right? By the same logic, you expect a higher APY on a five-year CD when compared to a one-year CD.
Well, a yield curve inversion is the opposite. Right now, investors demand to be compensated more for short-term loans to the U.S. government than for long-term loans. It sounds nonsensical – and it’s notable not only because it’s so strange, but because it’s a reliable indicator of an imminent recession.
Over the last 50 years, a recession has followed within 6-18 months (with an average of 12 months) after the initial inversion of the yield curve.
A recession is more than “a bad spell of data”
It’s easy to get caught up in the numbers and forget that “recession” is more than just a word. Behind the economic data are real American families, whose jobs and financial futures are at stake.
This article captures the recessionary feedback loop very well:
Recession-fearing investors make markets volatile; that, in turn, limits publicly traded firms’ access to cash. Fewer consumers out shopping weighs on firms’ sales – forcing businesses to cut costs to make ends meet. Joblessness can further exacerbate belt tightening among consumers, perpetuating even more unemployment.
In addition to that, the impacts from a recession don’t stop the moment markets crash (although that is one of the impacts). Major market drops are more an indicator of panic on Wall Street, which leads to even more panic as the contagion spreads.
Since 1937, there have been 13 official recessions. On average, stocks dropped 32% (with a dramatic range of 14 to 57%). Home prices fall, on average, about 5% per year for the duration of the recession.
Just how big a deal is that for you?
Knowing exactly where you are in the three phases of retirement saving can help you evaluate exactly how concerned you should be. (There’s a longer discussion at the link.)
During the accumulation phase, a recession and plunging stock prices might actually be good news.
If you’re in the preservation phase, a recession is bad news if your savings are over-exposed to riskier assets. As Kristian Finfrock, an investment advisor writing for Kiplinger’s, said:
…you should dial down your portfolio risk to better protect your money. Change your mindset. Instead of focusing strictly on growth, think about how much you’re comfortable losing at this time in your life.
And the closer you are to retirement, the more important this question becomes.
Recessions are an inevitable fact of life. They’re unavoidable.
Since we can’t control the economy, let’s focus on the things we can control…
Building a recession-resistant financial plan
There are a few practical steps you can take to ensure your savings are recession-resistant. Probably the most important consideration is whether you’re taking on too much risk – that’s an easy trap to fall into during bull markets. If you haven’t reflected on how much you’re comfortable losing at this time in your life, it’s a good idea to do so! As Mike Tyson famously said, “Everyone has a plan until they get punched in the mouth.”
You do not want to discover the sick feeling in the pit of your stomach that you’ve been taking too much financial risk in the middle of a bear market.
Practical steps you can take:
Speaking of diversification, Dr. Ron Paul told us he thinks of diversification with gold as insurance:
I would think people who are in it for the long term, it looks to me like this would be a very good time to buy … I look at gold as insurance.”
Historically, demand for gold as a safe haven surges during economic downturns. That means it’s smart to diversify your savings with gold before a recession begins.
As Precious Metals Specialist Phillip Patrick says, “When’s the best time to buy gold? Fifty years ago. When’s the second-best time to buy gold? Today.”
Just like a fire extinguisher or car insurance, it’s better to buy gold before you need it.
Peter Reagan is a financial market strategist at Birch Gold Group. As the Precious Metal IRA Specialists, Birch Gold helps Americans protect their retirement savings with physical gold and silver. Based in the Los Angeles area, the company has been in business since 2003. It has an A+ Rating.
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