Since 1953 there have been eleven recessions in the US, as identified by the National Bureau of Economic Research (NBER). The primary recession indicator is two consecutive quarters of declines in the gross domestic product (GDP). Still, more broadly, it usually consists of an overall sluggish economy, a fall in manufacturing, a reduction in jobs, and a rise in unemployment. In a recession, lower economic activity would generally lead to decreased inflation, but some recessions, such as 1980 and 1991, resulted from inflation and a tightening monetary policy. Consequently, the Fed is cautious about raising interest rates too quickly. The average length of a recession is 11 months, although the 2020 recession only lasted two months and the 2008 recession lasted 18 months.
While many believe we are headed for a recession, the economic data has not confirmed this prognosis. The flattening of the US Treasury Yield Curve is most concerning, which means that shorter-term interest rates are higher than long-term rates. For example, yields on the 7-year Treasury rose higher than those of the 10-year Treasury, which is unusual because investors typically expect more compensation for taking on the risk of owning longer-dated bonds. Usually, a 10-year bond yields more than a 7-year bond. A flat or inverted yield curve has historically been a reliable indicator of a pending recession.
So, a recession may be on the horizon, but since no one knows for sure when the U.S. will enter a recession again, it is more important to be prepared for an economic downturn rather than try and predict it. When recessions strike, it is best to focus on the long-term and manage your exposures through scientifically structured diversification, tilting towards value, limiting risk, and setting aside additional capital to invest during the recovery. Once the inequities that led to the recession are corrected, economies tend to rebound quickly, and you will be rewarded for adequately positioning your portfolio to participate.
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