Even though President Trump and Chinese President Xi agreed to a 90-day trade war ceasefire, market turbulence has remained high due to anxiety around trade tensions.
President Trump stated that “China talks are going very well,” but markets were on edge with President Trump and members of his cabinet talking about the use of tariffs against China.
Concerns about future growth also rose, as part of the “yield curve” inverted last week, meaning short-term interest rates were higher than long-term interest rates. Interest rates on both the 2-year and 3-year treasury bond were greater than the 5-year treasury bond.
The risk of a recession is indeed higher following a yield curve inversion; however, the time period to measure this is in years, not days. Simply put, when we look back historically, recessions typically didn’t occur until almost two years later after this type of inversion.
Also, stocks have historically moved higher well after yield curve inversions. Further, this is only one of many leading economic indicators we watch to measure recession risk. The other indicators are currently pointing toward a growing economy.
With all that said, in times of volatility like we’ve experienced over the past few weeks, it’s important to keep the long term in focus.
Corrections of 10% occur about every year and a half, while “bear markets” (defined as a drop of 20% or more) happen about every six years. In spite of these moves and the worries that go along with them, one thing has remained true: markets have always come back to reach new record highs.
The Simply Money Point
The recession risk is low over the next 6 to 9 months. This should eventually lead to calmer markets, but we expect turbulence to remain in the short run, especially until there is resolution to the trade war.
Simply Money Advisors will, of course, continue to monitor leading economic indicators for signs of a slowing economy. Regardless, a diversified portfolio with an eye on the long run will better help you weather any storm.