Stormy Skies Ahead

Is a recession looming on the horizon?
By Anthony Pellegrino

IN MID-AUGUST, the yield curve—the spread between yields on U.S. Treasury securities—inverted. The inversion was brief, but it was long enough to make Americans take notice. Nervous investors began to sell off equities. Suddenly, the word “recession” seemed to be on everyone’s lips.

Why the commotion? Inversions have preceded seven of the last nine recessions. While an inversion doesn’t necessarily mean that a recession will definitely occur, it has been a mostly reliable indicator over the last 50 years.

However, it’s important to note two critical pieces of information. First, historically, recessions don’t occur immediately after the yield curve inverts. On average, a recession occurred 22 months after the yield curve inverted.

Second, those recessions followed prolonged inversions. The inversion on August 14, 2019, lasted a mere 2 hours and 15 seconds. When the yield curve inverted in July 2006, it stayed upside down for nearly a year. Ultimately, that inversion ended up being one of the first signs of the impending 2008 financial crisis.

Churning Waters
Despite these somewhat reassuring facts, investors still wonder if it’s time to brace for a recession. While no one can predict when a recession will come, it’s only a matter of time before markets have a downside.

Two major factors are contributing to the current economic uncertainty. The trade war with China drags on. Manufacturers are hesitant to make plans, unable to determine production and shipping costs in the near future. Likewise, consumers feel the economic pinch when they pay more for goods because of increased tariffs.

Federal funds rates have also fueled talk of recession. While the Federal Reserve has lowered its rates this year, the general consensus is the Fed didn’t lower them far enough, fast enough.

The Federal Reserve’s treatment of rates over the coming six months might give us a better idea of the likelihood of a recession in 2020 or 2021.

Setting the Course
How can investors brace themselves for the storm of a possible recession? To steal the motto from the Scouts: Be prepared. Protecting yourself—and your assets—starts with the work you put in when skies are still sunny. Three steps you can take now include:
1. Review your risk tolerance. How much risk can your portfolio withstand? This number is based on a variety of factors, including how much time you have until retirement, your age, and your assets. It changes as you age; a 30-year-old will have a much different risk tolerance than a 60-year-old. If you haven’t done so recently, this is the perfect time to reassess how much risk you can take.
2. Reallocate your portfolio. Assets that you put in place 20 years ago may no longer align with your goals or your risk tolerance. It’s important to regularly review your holdings, reallocating as necessary to keep them in step with your needs.

3. Keep your eyes on the long-term picture. The average recession lasts 11.9 months. What goes down will come back up—eventually. Don’t let short-term events lead to emotional decisions. Instead, focus on your goals and stick with your plan.

If you have questions about your portfolio and its ability to withstand a potential recession, we can help. Call us at 630-620-9300 for your review today.

Anthony Pellegrino is the principal of Goldstone Financial Group. As seen on CBS 2 Sunday mornings as the co-host of “Securing Your Financial Future.” Visit goldstonefinancialgroup.com for more information. Investment advisory services offered through Goldstone Financial Group, LLC, a Registered Investment Advisor. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company