Recession Risk accelerating (kind of important)

Just in the last few days, there’s been a lot of talk in the financial world about yield curve “inversion.” Maybe you’re familiar with the term, maybe you’re not. Either way, we think it’s worth talking about, because it plays into the way we allocate our funds in the market.

Q: What’s a “yield curve inversion?”

A: It’s when a longer-term interest rate (like the 10-year Treasury note) actually goes lower than a nearer-term interest rate (like the 2-year Treasury note).

Q: Why do we care about it?

A: Because it’s the best single gauge of recessionary pressure out there.

Q: Why is it a good gauge?

A: Because it means that people generally don’t want to borrow money for longer timeframes.

Q: Why don’t they want to borrow?

A: Because they don’t expect to be able to make more profit than they’ll have to pay in interest.

Make sense? Basically, a “yield curve inversion” just means that, broadly speaking, the credit market is telling us that there won’t be economic growth, because people don’t expect to be able to make much business profit in the coming years.

Of course, any economist could tell you something like this. But “any economist” isn’t a very useful guy to have around. What’s much more valuable is taking this indicator and making it practical by comparing the yield curve to stock market returns throughout history. And when we do that, we get this:







This is Recession Risk over time. When Recession Risk is at zero, that’s a great time to be in stocks. When it’s at 40%, that’s not such a great time to be in stocks. When it’s somewhere in the middle — well, it’s somewhere in the middle.

The highest the Recession Risk indicator has ever gotten is around 40%, which, translated, means that “there’s a 40% chance that the market will stay flat or go down from here.”

That may not sound like a lot, but in the world of investing, a “40% chance” that stocks are going to go down is a REALLY BIG DEAL. Which is why we’re going to KEEP YELLING about this Recession Risk indicator — because it’s KIND OF IMPORTANT.

Right now, “there’s a 17.28% chance that the market will stay flat or go down from here.”

Recession Risk is one of the factors that we plug into the “Your Allocation” computation, so if you’re already following the system, fear not, you’re already doing everything right.

If you’re not already following the system, then we hope that you’ve got your own way to accurately weigh the risks presented by the stock market.

Because this is KIND OF IMPORTANT.

It’s way easier to panic

Fear is not the best motivator when it comes to growing wealth.

Yet, the only people who are selling out of the stock market right now are people who are afraid. So let’s zoom out for a moment, take a deep breath, and think about the big picture.

The market can flip from greed to fear just as quickly as it goes the other way. Three weeks ago, it flipped from greed to fear, and some people are very scared about that.

The importance of having a solid system is never more apparent than at times like these. The S&P 500 is 6.8% off its highs and all sorts of pundits are already calling for 30% declines in the stock market. Lucky for us, we know that what you hear on TV (and on other media) is entirely fictional. That’s why no decision (especially decisions involving your financial well-being) should ever be made based on the manufactured opinions of people who are paid to, essentially, entertain you.

Decades of data and rigorous analysis tell us right now that there is a 15.41% chance that the S&P 500 will either stay flat or go down from here.

That’s right — Recession Risk is at 15.41%. Higher than a month ago, sure, but still quite a distance from “scary.”

Again — step back for a minute. 15.41% is less than 50%. Less than 40%. Less than 25%. In other words, this is by no means a time to panic, even though that’s what a lot of people would like you to do. As risks rise across the board, our system will recommend paring down your exposure to the S&P 500 according to your own Risk Profile — but until then, don’t let all the noise get to you!

Will there be a recession? Yes. Will it be right now? Not likely. And even if things get even worse from here, you won’t lose more than your chosen Risk Profile as long as your stick to Your Allocation. It really is as simple as that.

Always remember: Fear will only serve to separate you from your hard-earned money (and you could say the same for greed!).

No time is the time for panic. Stick to the plan! In the long run, your portfolio will thank you.

0 comments on “Recession Risk rising fast!”

Recession Risk rising fast!

Sure, our Recession Risk indicator (RR) has been slowly rising since 2011, but the keyword there is slowly.

Ever since June of 2018, it’s taken off like a rocket. And even if 12-13% still isn’t a high risk of recession, we can tell that if things keep moving the way they are, we’ll be at around 25% chance of recession by the beginning of 2019!

All of our Risk Profile portfolios take Recession Risk as a large input for Your Allocation. Right now, it’s only a small factor in the size of the optimal S&P 500 allocation, but it’s getting bigger every day.

The business cycle is still a very real thing — much as some people would like to pretend it isn’t.

Historically, Recession Risk fluctuates from 0% to 40%. Learn more about how we deal with the risk of recession.