These Key Indicators Will Help You Stay Ahead Of The Game
Stocks have been riding high and the Federal Reserve has hit the pause button on rate cuts. Even after some big recession scares in 2019, everything seems peachy again now, right? Not so fast.
There are the obvious signs of a recession that everyone knows about. Falling GDP, high unemployment, a plummeting stock market. Those metrics seem fine, so what’s to worry about?
The savvy investor looks deeper though, and consequently, they’re ready and prepared for trouble before the average person.
Those indicators we just mentioned? Usually, by the time they appear, the damage has already been done to your portfolio. Not much use moving your retirement assets out of the stock market AFTER it tanks, is there?
At Regal Assets, we’ve been helping our clients successfully manage their wealth for over a decade now, through both the good and the bad. With our guidance, you can prepare yourself and protect your assets, before it’s too late. By digging deeper and familiarizing yourself with some of the lesser-known signs of a recession, you’ll be able to stay out in front of the trouble.
China’s economy, even more than our own, has been in full gear since the 2008 financial crisis. Most casual investors aren’t aware of the debt crisis that is taking place within, however.
Both consumers and state industries have borrowed heavily in recent times, and Chinese banks are feeling the pain of a huge number of outstanding loans that now have little chance of being repaid. They are in a vicious circle. The government has repeatedly attempted to get a grip on out of control lending, but each time the global economy has stuttered, thus forcing Beijing to loosen credit yet again.
To add the mounting list of worries, the growth of industrial production is at a 30-year low. China ultimately wants its economy to move away from manufacturing to become more service-focused, but that is a long road that will have some painful bumps in it sooner than later. It’s going to get worse before it gets better, and the global reach of the issue means that it will no doubt impact America’s next recession.
The Yield Curve
One of the most closely watched recession indicators that insiders keep an eye on is the yield curve. “Yield” is merely the interest rate on a bond. They have different durations as well (more commonly known as “maturity”), ranging from a month to 30 years. The yield curve basically compares how the rates on these different bond lengths change over time.
Usually, the interest rate on bonds with longer maturity is higher than those with shorter maturity. This makes sense, as you’re being rewarded to holding onto it longer. “If you’re an investor, and you’re given the choice for investing for a month or investing for 10 years, you would say, ‘Listen, a lot more can go wrong in 10 years than it can in a month. I’m going to demand a higher interest rate, a higher yield,’” says Dan North, lead economist at Euler Hermes. “The yield curve is positive sloping – most of the time.”
In contrast, an inverted (downward sloping) yield curve is a big red flag to analysts. It essentially means that investors think it’s riskier to hold their bond over the short term. What would cause that sort of behavior? Simply put, factors that would ultimately contribute to a recession.
We’ve already seen the yield curve invert multiple times in 2019, with the Federal Reserve lowering interest rates in an effort to combat it. It is only a matter of time until they can’t control it anymore, though.
Consumer Confidence Indexes
It’s smart to pay attention to the general population’s frame of mind when it comes to the economy. Peter Donisanu, an investment analyst at Wells Fargo, says how “sometimes a recession could be self-fulfilling. You build up so much pessimism about the economy that activity stops.”
Consumers are what really drive the economy in the end. In fact, consumer spending as a percentage of GDP has been gradually increasing. It was 61% in 1980 and has risen to 68% today. That’s a huge amount.
Consumer confidence is also currently historically elevated. It dropped in early 2019 as a result of the government shutdown but has since recovered. Regardless, short-term fluctuations like that aren’t something to worry about. Long term downtrends though are a surefire sign of impending recession.
Brand McMillan, chief investment officer at Commonwealth Financial Network, says how actually “confidence can be quite high and we can still have a recession. What’s a much better indicator is year-on-year change. When it drops 20 points year on year, that’s trouble. Two months ago, the year-on-year change was 7.9. [Now] it’s -10.2. It’s dropped 18 points in two months.”
Basically, if the current pace continues, then be ready for a recession.
Now there’s the blatantly obvious sign of a recession, high unemployment numbers. Usually by that point, however, the economy is already knee-deep in recession, with mass job loss the result and not the indicator.
Savvy investors will look to other employment data. Instead of looking for an increased number of jobless, you want to keep an eye out for when unemployment actually bottoms out. In 2018, U.S. unemployment reached 3.7%. That’s the lowest rate since 1969. It’s been great news for workers but is bad news for the future of investors.
Traditionally, the U.S economy has gone into recession roughly nine months after the bottoming of the unemployment rate. The catch though is that it’s hard to actually recognize the bottom when you’re in it. Hindsight is 20/20 and it’s easy to look back on a chart and pinpoint it. Still, it’s good to regularly monitor weekly and monthly job data to see if any trends stand out. Analysts love to obsess over the numbers, so you’ll have no shortage of opinions to consider.
Inflation & Wage Growth
Both of these things are good in moderation. Their presence generally indicates unemployment is low, workers are being paid fairly, and consumers feel free to spend their money. Demand for consumer goods increases, retail prices rise accordingly, and inflation increases.
When inflation climbs too rapidly, however, the Federal Reserve raises interest rates, which makes borrowing more expensive. If businesses are already concerned about a recession, then they’ll be even less likely to borrow for capital expenditures if interest rates are high.
Inflation isn’t currently a problem, in fact, it’s the opposite at the moment. Instead of raising rates, the Fed has been cutting them to try and stimulate inflation, with 2 percent being the target.
U.S. Manufacturing Growth (Or Lack Thereof)
It’s no secret that U.S. manufacturing output has massively dropped off in the past few decades, but the state of the country’s manufacturers remains a solid indicator of overall economic health.
One key metric is released by the Institute for Supply Management every month, and surveys manufacturers to determine their output. Basically, how busy are they? The bad news is that this signal is flashing red.
When the index is above 50, manufacturing is growing. When it’s below 50, factory output is shrinking. It fell below 50 this past fall, hitting 47, the worst level in 10 years. Anything below 45 means recession, and we are slowly inching towards that point.
We live in an increasingly digital world. You can be in the middle of nowhere and still be able to order something online. You can even have it show up at your door the very next day, clear across the country.
Think of how much really goes into it all. That one package from your favorite online merchant will travel on several different vehicles, be processed at various locations, and involve multiple workers over the course of several days.
But how is all of that actually achieved? The answer is freight. Commerce still requires the movement of goods from one location to the other. Trains and trucks still move massive amounts of goods. Dejan Ilijevski, president at Sabela Capital Markets, notes that “Changes in rail [and truck] traffic data can be a leading indicator for changes in economic activity.”
2019 lagged in overall freight loads compared to the previous three years. Not a good sign.
We’ve been in a state of economic uncertainty for a while now, however, and witnessed several of these predictors manifest themselves in 2019. While the instability isn’t likely to go away any time soon, it’s also important to remember not to panic. The main thing is to not be a passive investor in times like these.
None of these single indicators by themselves are a sign of impending doom. If several of them begin to flash red, however, then it could indeed be a bad sign of things to come. By being smart, keeping an eye out, and knowing the recipe for a recession, you’ll be better prepared than most and ready to take action when necessary.
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