6 Main Signs of a Recession

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Now that we have broken even more records this week, people always ask me, “Debbie, how do I know when the next bear market or recession is coming?”  This is actually an excellent question as market watchers wonder the same thing, particularly at a heady time like this.  And while economists debate the answer to that question, there are 6 main signposts that indicate a recession is imminent, according to ThinkAdvisor, and we discuss a few below.

 

  1. Beyond full employment

In the Monetary Policy Report, the Fed reported that the U.S. labor market is near or beyond full employment. When this occurs, it often sets the stage for a more aggressive Federal Reserve tightening monetary policy and rising interest rates. According to Mark Zandi, chief economist at Moody’s Analytics, past recessions have occurred on average three years after full employment has been reached, suggesting a possible recession in 2020.

 

  1. Trade war

It is nearly impossible to turn on CNN these days without hearing the words “trade war.” It seems that everybody is worried about the effects of a trade war, and with good reason. A trade war could result in slower growth and higher inflation, which would damage economic growth here and abroad.  Thankfully, we are seeing some encouraging signs from Mexico and Canada talks, but we will have to wait and see.

 

  1. Inverted yield curve

This is the classic indicator based on whether the 2 Year US Treasury yield is higher than the 10 Year US Treasury Yield.  It is supposedly an indication of slower growth in the future.  Unfortunately, the inverted yield curve, previously seen as a reliable indicator, has been called into question due to Quantitative Easing here and abroad, thus pushing down interest rates and artificially affecting the bond market.  Having said that, this is still a critical sign to watch, and lately it has been flashing warning signals as it has been tightening.

 

  1. Year-over-year decline in stock prices

This is clearly not an issue, with the domestic markets returning about 20% last year and breaking new records this year.  However, some question the breadth of these market returns, as up to 50% of the recent returns in the SP500 Index are attributed to the technology/FANG stocks.

 

  1. Reversal in the unemployment rate

Obviously, unemployment has been flashing incredibly strong signals with unemployment at multi year lows.  The unemployment rate is currently at 3.9%, which is a 17-year low.

 

  1. Copper prices below $2.50 per pound

Copper prices have always been something to watch as it has several industrial uses, so when the price drops, it signals a slowdown in production, hence the nickname Dr. Copper. Copper prices today are near $2.66 per pound.

 

Bottom line: there are many mixed signals about when to expect the next bear market. Certain signs point towards an upcoming recession (such as being beyond full employment), while others do not signal a recession (such as the booming stock market). However, this just means that as market watchers, we need to be even more vigilant when watching these signs and prepare ourselves for the future. For those who are concerned, let us know as we have many options to discuss with you. Additionally, feel free to contact us if you have any questions.

 

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