Since the recent market fluctuations related to the COVID-19 virus as well as the collapse in oil prices due to OPEC’s (Organization of the Petroleum Exporting Countries) failure to agree on production cuts, there has been talk of a “technical recession.” Today I thought we would revisit what that means and how it impacts your portfolio.
The definition of a recession is two consecutive quarters of negative gross domestic product. We often confuse a drop in the stock market with a recession. While they can and frequently do happen together, they are completely different events. It’s important to note that a recession is a normal part of the economic cycle. Unfortunately, a recession can only be confirmed once we are already in it since it’s based on the previous two quarters.
A “technical recession” is when you have 2 negative quarters of GDP, but it is due mainly to slowing growth or an isolated event rather than a major underlying cause. Technical recessions are usually short in duration and mild in severity. I bring this up today because the COVID-19 virus could absolutely cause a technical recession due to the fact that many businesses will be economically affected by it even though it is an isolated event and not a sign of broader problems with the economy. I do not believe the COVID-19 will cause the U.S. economy to fall into a deep recession but it could cause two negative GDP quarters.
Why do I believe this is the case? Recessions, while they can’t be perfectly predicted, do have indicators which help identify that one might be on the way. The first is an inverted yield curve, which simply means that the two-year U.S. Treasuries are yielding more than the 10-year U.S. Treasuries. In a normal yield curve as one would expect, the longer the duration the higher the yield. An investor would expect to be paid more for having to wait longer to get their money back on the purchase of a Treasury bond. An inverted yield curve disrupts this normal pattern, making longer term bonds less attractive. While we technically had a slight inversion a while back, it was not caused by normal market functions and since it was "man-made" it may be less reliable of an indicator.
Extreme volatility is the second measure, which we have certainly seen over the past few weeks, but again, most of this was due to the COVID-19 virus and a failed OPEC agreement.
Next would be high unemployment, which we have absolutely not seen, as we are still at record low unemployment.
Another indicator would be strong declines in home prices, which we have also not seen.
Lastly, negative earnings would be the final indicator. While we have not yet seen this, it might be somewhat expected in the future due to the effects of COVID-19.
So are we heading for a recession or not? It is my belief that while we may see a technical recession by definition, it is not likely to be a deeper recession and as such, the economy will likely recover quickly. I don’t know that I can say I feel the same way for countries like Japan, or China and possibly a few European countries, as they may likely be pushed into a full recession. It is important to note that the average full recession lasts 13 months, so I would expect any possible technical recession to be on the shorter end of that.
Don’t forget, 2020 is an election year (as if it were possible to forget) and 19 of the last 22 election years saw positive markets. It is my feeling that markets may move higher later into the year unless COVID-19 gets significantly worse.
I hope this helps and as always, feel free to reach out with any questions.
T. Eric Reich, CIMA, CFP, CLU, ChFC is president and founder of Reich Asset Management and can be reached at 609-486-5073 or email@example.com.
This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results. Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS.