This is not 2008

Looking to get the attention of millions of people? Just say the word “recession.” Data from Google shows that searches for “recession” are at their highest level since November 2009, just a few months after the end of The Great Recession.

We all know that recent stock and bond market movements have investors a little on edge. With an inverted yield curve and interest rates at an all time low, we can’t really blame them for being cautious. However, we can say that blowing these movements out of proportion is a waste of energy, particularly when the only evidence we have that a recession is coming is that circumstances preceding have been similar in the past. The correlation between an inverted yield curve and a recession has taken over the finance industry to such an extent that for some investors it’s not so much a matter of whether a recession is coming, but how long until it starts- let’s just go ahead and say that this thought process has a few flaws.

Let’s flashback to the 2008 economic crisis- real estate was coming down from its gross overvaluation period, and banks were doing damage control by selling mortgage-related securities at all-time low prices. This factor played a huge role in the subsequent economic downturn, and as a consensus, is not a circumstance we’re currently facing. While it can be argued that overvaluation currently exists in the stock market and could be considered an equivalent factor, there’s still the issue of perceiving “fair-value” now versus 10 years ago- the years just aren’t accurately comparable, so we can’t rely on this reasoning.

For arguments sake, let’s consider an inverted yield curve as a dead-set indicator of an impending recession. In 1980, short-term Fed rates rose to 19% to control inflation, and the 30-year Treasury Bond was yielding almost 13%. At the time of this article, the 30-year Treasury Bond is yielding 2.02%, and Fed rates have just been cut to 2.25%. So as much as our current economic situation isn’t ideal, we’ve seen it before and more importantly, we have certainly seen much worse. So yes, the economy is slowing down, but don’t you slow down when you eat a little too much too fast?

We’ve said it once, and we’ll say it again. The economy is self-cleaning- recovering from the Q4 2018 mess takes more than just a quick tidy up and shoeshine. There’s adjustments and corrections that need to be made, and nature is taking its course. There’s a reason these terms exist and as professional investors, we can’t predict the future- but we can prepare for scenarios that satisfy short-term, intermediate, and long-term goals.

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