There are three speedbumps on the right and two speedbumps on the left. My son has his permit and I let him drive on the way to drop him off at his high school. He likes to take an alley to avoid turning onto a major street, but it has speedbumps. In the beginning, he hit them so hard that I had to start putting a lid on my coffee. Financial recessions are a lot like speedbumps.
First, a recession is a short-term financial decline. Investors are always nervous about when the next one will be because the bond market is showing signs of recession.
A big concern right now is the 2-year and 10-year Yield Curve Inversion. The US Treasury has investments for people to invest in which are similar to bank CDs. An investor can invest in 3-month, 1-year, 2-year, 5-year, 10-year, or 30-year Treasury Bonds. Normally 1-year pays more than the 3-month, the 10-year pays more than the 5-year, and so on. The longer the investment the better the return to reward you for the longer commitment.
Historically a recession is near when the yields invert or flop, where the shorter-term yield pays more than the longer-term rate, because the near-term is riskier than the long term. A yield curve inversion is an anomaly that happened on 03/31/22 and again on 04/04/22 and in both cases, it was the 2-year Treasuries yielding more than 10-year notes according to CNBC.
So, here’s my take. I agree that inversions are genuine warning signs for recessions, but I think it can take years before a recession happens. A recession could be coming but I don’t see it happening this year.
The last six times the 2-year and 10-year part of the yield curve inverted, on average a recession came a year and a half later. That’s on average, one came six months after the inversion but another time the recession took almost three years to happen.
I think we need to stay invested because there is a potential return to be made before and a potential good return to be made after the recession. We don’t slow our cars down because there’s a speed bump a couple of miles away. We become more watchful and ready to slow down as we see more signs saying the speed bump is close.
Like the bumper stickers from the ‘80s, “Recessions Happen.” There were 12 recessions in the 20th century and so far, the 21st century has had 3 recessions according to thebalance.com. Most investors will experience multiple recessions in their lifetime.
The inverted yield curve, inflation, and the Fed’s rate hikes are all concerning, but the American consumer and the labor market seem strong which will make the economy continue to grow this year. This would be a good time to meet with your financial adviser to make sure you are invested in the right amount of risk for your comfort level and goals.
I hate speedbumps and stoplights and will drive a long way out of my way to avoid them. I don’t use that alley that my son uses because of my hatred of speedbumps, but they don’t bother him. He thinks speedbumps are just part of the drive and stays focused on where he is going. Financial recessions are a lot like speedbumps, just part of the trip. If handled correctly they don’t mess up your journey.
Thankfully his driving getting a lot better too.
Have a blessed week!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.
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