The Spooky R Word Is Back....

Torn ripped devalued one hundred dollar bank note on a black background. close-up of bad money.

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For the first time in what feels like ages, the R word is back as people are beginning to talk about an impending recession. On Monday, several "big  banks" came out and used the R word and that changed the narrative. Goldman Sachs lowered its fourth-quarter growth forecast by 20 basis points to 1.8% as the firm no longer expects a trade deal before the 2020 election. Elsewhere, Bank of America raised the chance of a recession to more than 30% in the next 12 months as the firm believes many economic indicators are “flashing yellow” and separately, Morgan Stanley believes the Fed will cut rates to zero in the near future. What does all this mean for your money? Let's find out...

The Worrisome Action Is Coming From The Bond Market, Not The Stock Market:

Over the past few weeks, the worrisome action has been happening in the bond market, not the stock market. After tensions grew regarding the U.S. China trade deal, bonds soared and bond yields tanked. Then, in the past 24-hours, the bond market flashed a classic recession warning when the bond market inverted (the yield on the 10 year fell below the yield on the 2-year). In the past, that has signaled a recession and all things being equal that is not normally a bullish sign. Additionally, we are already seeing several major economies around the world, slow down considerably, or outright contract. If that continues, they will fall into a recession and the odds of a global recession will increase.

I spoke to Tom Chancellor, CFP® is an Investment Advisor Representative with Teak Tree Capital Management in Fort Worth with $570MM under management, and he told me to pay attention to the bond market but he is more concerned with the ripple effects from all the disruptions we are seeing in global trade. Earlier, Tom told me via email, "While it is smart to pay attention to the recession signals from the bond markets, keep in mind that we are also experimenting with never before seen levels of government supplied credit pushing rates down aside from natural demand. I’m more concerned about the ripple effects of international trade disruptions. It seems that the narrative of synchronized global growth may be changing to one of win/lose competition. In the past, similar situations caused severe disruptions. So this may be a time when defending capital is more important than trying to squeeze the last bit out of an aging bull market."

Everyone Take A Breath, The Stock Market Is Just Pulling Back:

Meanwhile, with all this noise, the benchmark S&P 500 index just hit 3027.18, a fresh record high, on July 26, 2019. Since then, the benchmark is down just over 5% which is barely a blip on the long-term radar. Typically, a pullback is defined as a decline of 0-9.9%, a correction is 10-19.9% and a bear market is a decline over 20% or more. The action is not ideal in the market and there are are a lot of areas that are under pressure but that does not mean you should panic.

I spoke to Timothy Schantz, Vice Chairman, at Clear Harbor Asset Management with approximately $750mm in assets under management, and he told me, "Investors should not make all or nothing trades. Remember, you need to be ‘right’ twice; so, trimming risk exposures gradually and well in anticipation of a downturn, say in stages of 5-10% of your overall portfolio at each phase of risk ratchet, are generally to be recommended." Meaning, you don't have to panic, sell everything and move 100% to cash, only to find the market much higher after pullback runs its course. Mr. Schantz, also told me, "it is important to be diversified and preserve some meaningful levels of liquidity. This will both protect one’s cash flow and living standards as well as provide for opportunistic investment and/or reentry. It wouldn’t hurt to line up some credit availability with banks and others ahead of a downturn for similar reasons." The idea here is to protect your overall financial picture, not just your investment portfolio. You want to have access to cash, if needed and you want to make sure your portfolio is diversified and well balanced.

The One Big Wild Card - Easy Money From Global Central Banks

The one big wild card is that we have easy money sloshing around the world from global central banks. Since the end of June we have seen a handful of central banks, including the Federal Reserve, cut rates to get ahead of the global economic slowdown. Let's see what happens going forward because easy money from the Fed and other central banks, is not something that should be dismissed or taken lightly.

Another piece of wisdom comes from Steve Csenge, AIF, CFP, Partner, Csenge Advisory Group $425 million in assets under management. Mr. Csenge told me, "Don’t knee jerk react. Historically the inverted yield curve has been an indicator of recessions, but, not a perfect one and today’s context is very different from the past. Much of the sovereign debt in Japan and Europe is in negative rates. That has never been the case before. With negative rates elsewhere more capital will flow into our debt lowering the yields. So how much is driven by possible recession factors and how much by the prevailing lower rates globally? Also, historically there is a sell-off when the yield curve first inverts but also a significant rally before the true market top." Steve brings up a great point about staying calm when you invest.

Bottom Line:

No one knows what will happen tomorrow or next year for that matter. What we do know is that the last recession was ten years ago and this is the longest expansion in history. Eventually, another recession will happen, it is just a matter of when, not if. If you prepare for it now, before it happens, you will be way ahead of the crowd when it eventually happens.

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Torn ripped devalued one hundred dollar bank note on a black background. close-up of bad money.

Getty

For the first time in what feels like ages, the R word is back as people are beginning to talk about an impending recession. On Monday, several "big  banks" came out and used the R word and that changed the narrative. Goldman Sachs lowered its fourth-quarter growth forecast by 20 basis points to 1.8% as the firm no longer expects a trade deal before the 2020 election. Elsewhere, Bank of America raised the chance of a recession to more than 30% in the next 12 months as the firm believes many economic indicators are “flashing yellow” and separately, Morgan Stanley believes the Fed will cut rates to zero in the near future. What does all this mean for your money? Let's find out...

The Worrisome Action Is Coming From The Bond Market, Not The Stock Market:

Over the past few weeks, the worrisome action has been happening in the bond market, not the stock market. After tensions grew regarding the U.S. China trade deal, bonds soared and bond yields tanked. Then, in the past 24-hours, the bond market flashed a classic recession warning when the bond market inverted (the yield on the 10 year fell below the yield on the 2-year). In the past, that has signaled a recession and all things being equal that is not normally a bullish sign. Additionally, we are already seeing several major economies around the world, slow down considerably, or outright contract. If that continues, they will fall into a recession and the odds of a global recession will increase.

I spoke to Tom Chancellor, CFP® is an Investment Advisor Representative with Teak Tree Capital Management in Fort Worth with $570MM under management, and he told me to pay attention to the bond market but he is more concerned with the ripple effects from all the disruptions we are seeing in global trade. Earlier, Tom told me via email, "While it is smart to pay attention to the recession signals from the bond markets, keep in mind that we are also experimenting with never before seen levels of government supplied credit pushing rates down aside from natural demand. I’m more concerned about the ripple effects of international trade disruptions. It seems that the narrative of synchronized global growth may be changing to one of win/lose competition. In the past, similar situations caused severe disruptions. So this may be a time when defending capital is more important than trying to squeeze the last bit out of an aging bull market."

Everyone Take A Breath, The Stock Market Is Just Pulling Back:

Meanwhile, with all this noise, the benchmark S&P 500 index just hit 3027.18, a fresh record high, on July 26, 2019. Since then, the benchmark is down just over 5% which is barely a blip on the long-term radar. Typically, a pullback is defined as a decline of 0-9.9%, a correction is 10-19.9% and a bear market is a decline over 20% or more. The action is not ideal in the market and there are are a lot of areas that are under pressure but that does not mean you should panic.

I spoke to Timothy Schantz, Vice Chairman, at Clear Harbor Asset Management with approximately $750mm in assets under management, and he told me, "Investors should not make all or nothing trades. Remember, you need to be ‘right’ twice; so, trimming risk exposures gradually and well in anticipation of a downturn, say in stages of 5-10% of your overall portfolio at each phase of risk ratchet, are generally to be recommended." Meaning, you don't have to panic, sell everything and move 100% to cash, only to find the market much higher after pullback runs its course. Mr. Schantz, also told me, "it is important to be diversified and preserve some meaningful levels of liquidity. This will both protect one’s cash flow and living standards as well as provide for opportunistic investment and/or reentry. It wouldn’t hurt to line up some credit availability with banks and others ahead of a downturn for similar reasons." The idea here is to protect your overall financial picture, not just your investment portfolio. You want to have access to cash, if needed and you want to make sure your portfolio is diversified and well balanced.

The One Big Wild Card - Easy Money From Global Central Banks

The one big wild card is that we have easy money sloshing around the world from global central banks. Since the end of June we have seen a handful of central banks, including the Federal Reserve, cut rates to get ahead of the global economic slowdown. Let's see what happens going forward because easy money from the Fed and other central banks, is not something that should be dismissed or taken lightly.

Another piece of wisdom comes from Steve Csenge, AIF, CFP, Partner, Csenge Advisory Group $425 million in assets under management. Mr. Csenge told me, "Don’t knee jerk react. Historically the inverted yield curve has been an indicator of recessions, but, not a perfect one and today’s context is very different from the past. Much of the sovereign debt in Japan and Europe is in negative rates. That has never been the case before. With negative rates elsewhere more capital will flow into our debt lowering the yields. So how much is driven by possible recession factors and how much by the prevailing lower rates globally? Also, historically there is a sell-off when the yield curve first inverts but also a significant rally before the true market top." Steve brings up a great point about staying calm when you invest.

Bottom Line:

No one knows what will happen tomorrow or next year for that matter. What we do know is that the last recession was ten years ago and this is the longest expansion in history. Eventually, another recession will happen, it is just a matter of when, not if. If you prepare for it now, before it happens, you will be way ahead of the crowd when it eventually happens.

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CEO of 50 Park Investments & ChartYourTrade.com. I use intellectual arbitrage & destroy mental walls.