Year to date the S & P 500 index is up 20.54% through the third quarter, which might cause us to get excited. We may ask why investors aren’t pouring money into the equity markets. Looking through a different lens we may begin to understand why. The S & P 500 is up 4.25% over the last twelve months through 9-30-19. The most recent Institute for Supply Management (ISM) monthly survey showed manufacturing activity had shrunk to its lowest level since June 2009[i]. Economic indicators remind us of the late 90’s when an inverted yield curve (short-term rates are higher than long-term rates) signaled a lurking recession which didn’t develop. Like then, the Federal Reserve made mid-cycle rate cuts to ward off global risks.
Surveys and business sentiment point to deeper slowing in economic activity which could impact future hiring. As we head into earnings-season we will begin to get a firsthand look at how businesses have fared in 2019, and what their prospects are looking forward over the next twelve months. Unemployment claims could begin to rise if businesses begin to see slowdowns. Although the stock market hit new highs this year, this doesn’t translate into earnings for companies. The trade war with China is taking its toll on business sentiment and the stimulus from the 2017 tax cuts has run its course.
Jeffery Gundlach, CEO of DoubleLine Capital and so called “Bond King” spoke recently at an event in London and, according to Bloomberg, said the odds of a recession before the 2020 election are 75%[ii]. Consumer spending and low interest rates may delay a recession. However, recessions are quite normal during an investor’s lifetime. They come in different degrees of volatility; but even the recession of 2008, which is the worst recorded in modern times, eventually passed and markets recovered to new economic highs.
What’s the best advice leading into a recession?
- Know your risk tolerance
- Diversify your portfolio
- Know your lifestyle needs
- Be patient and allow enough recovery time
The best defense is knowing that a well-diversified portfolio is not suddenly loaded with bad investments just because the portfolio declines during a recession. Rather, a well thought out strategy provides you with the ability to weather the storm over time. Although you might feel like the portfolio is sinking, you’re really feeling your emotions taking charge. Positioning your portfolio between equity and bonds, fixed income and cash will help to mitigate your emotions.
Throughout this year we have allocated your portfolio to be resilient for the next downturn. That is not to say your portfolio won’t decline. The weather may be changing but your portfolio is positioned to absorb some shocks. Please call us with your questions or concerns.
Thomas L. Menzel, CFP® Laura Biermann, CFP®President Vice President
[i] Source: Schwab Center for Financial Research, October 2, 2019
[ii]Source: CityWireUSA.com, by Nicole Piper, September 19, 2019
IMPORTANT DISCLOSURES: The opinions presented in this communication are subject to change without notice and no representation is made concerning actual future performance of the markets or economy. Information obtained from sources is considered reliable but is not verified. The research and other information provided herein speak only as of its date. We have not undertaken and will not undertake any duty to update the research or information or otherwise advise you of changes in the research or information. Performance information presented is not an indication of future results and index data is provided for market reference purposes only. This is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. This document is the property of Legacy Financial Advisors and is intended solely for the use of the Legacy client, individual, or entity to which is addressed. This document may not be reproduced in any manner or re-distributed by any means to any person without the express consent of Legacy. This material is for educational purposes only. Mis-transmission is not intended to waive confidentiality or privilege.