In this episode we're going to take a look at a few signs that indicate that the U.S. may be headed for a recession in 2019 or 2010, and what that means for the U.S. economy and the stock market.
A decade ago, things were looking pretty dire. In October 2009, the U.S. unemployment rate peaked at 10%, and the Federal Reserve was scrambling to incite calm in a very jittery stock market and U.S. economy.
Just seven months earlier, the Dow Jones Industrial Average, Nasdaq Composite, and broad-based S&P 500 all hit multiyear lows.
But things have rebounded in a big way over the past decade. We're currently in the midst of the longest expansionary period for the U.S. economy in recorded history. The unemployment rate is at a nearly 50-YEAR low, and the Dow, Nasdaq, and S&P 500 have all hit record highs since the Great Recession.
Unfortunately, all good things must come to an end.
Right now there are a few red flags indicating that there could be trouble ahead for the U.S. economy and the stock market.
The first red flag is the inverted yield curve. A yield curve inversion happens when longer-maturing bonds have a lower yield than shorter-maturing bonds.
Generally speaking, short-term bonds should have lower yields than long-term bonds. After all, if you're giving up your money for a longer period of time, you expect to be paid more for doing so.
But over the past couple of months, the 2-year and 10-year Treasury note swap places a few times, with the 2-year note bearing a higher yield than the 10-year -- which is known as the inversion.
Every single recession in the U.S. economy since World War II has been preceded by an inversion of the yield curve, although it's important to note that not all yield inversions have necessarily been followed by a recession.
Nevertheless, inversions don't come about unless there's some serious concern about the health of the U.S. economy.
A second concern for the economy is the current contraction in U.S. manufacturing. The Institute for Supply Management (ISM) releases its Purchasing Managers' Index (PMI) every month, which is a gauge for how the manufacturing sector is doing in the U.S., and in September, the PMI Index fell to 47.8%. That's the lowest percentage it's been since June 2009 and any reading below 50 signals a contraction.
There's little doubt that the ongoing trade war between the U.S. and China is the biggest headwind behind this confidence collapse in manufacturing.
Peter Boockvar, the chief investment officer at Bleakley Advisory Group, recently said that, "We have now tariffed our way into a manufacturing recession in the U.S. and globally."
The U.S. and China have been trying to work out a long-term trade deal for more than a year now, with tariffs being imposed on and off for the past 15 months.
There simply is no quick fix to the trade war, and the longer it lingers, the more U.S. manufacturing may suffer.
Lastly, history would suggest that the stock market and U.S. economy are primed for a recession.
Despite more than 10 years of expansion, there's a good probability that a recession will happen sooner rather than later.
The U.S. has had 14 recessions over the past 90 years, or about one every 6.5 years. Even though the U.S. economy doesn't stick to averages, this long-term data is pretty clear that recessions are a natural and unavoidable part of the economic cycle.
We also know that stock market corrections are perfectly normal. In fact, the S&P 500 has had 37 corrections of at least 10% since 1950.
The bottom line is that no matter what the U.S. economy has historically thrown at the Dow, Nasdaq, or S&P 500, they've always bounced back stronger than they were before. That's why long-term investors continue to be rewarded for their patience.
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