I see lots of people here talking about recessions and market crashes as though they were the same thing. So let me point out that they aren't. A recession is when GDP goes down and a market crash is when stock prices go down. Either one can happen without the other.
I’d say that while the stock crash of 2008 may have subsided, there are still fundamental problems being suffered through across the US from that fall.
Right, they aren't the same. The '87 black friday crash made a big impact on the investment community, but it wasn't a recession.
The commonly used U.S. definition is the one from NBER (National Bureau of Economic Research):
"A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."
The stock market is oftentimes regarded as a leading indicator for the broader economy and is why it’s a strong indicator oftentimes. I’m not quite sure if there’s any causal relationship in any way though.
Let’s say your boss gives you a 3% cut instead of a raise because you’re company didn't earn as much money. That’s less money you could spend or invest to increase the value of other companies and you’re decrease in pay makes you skeptical. So many people buy when they feel good which is usually when the market is high, and panic when the recession hits because they over extended and are forced to sell low. If you aren't earning as much money, you aren't going to spend as much money. The relationship is as simple as that.
> Let’s say your boss gives you a 3% cut instead of a raise
That basically doesn't happen. If 3% of the payroll needs to be cut, ~3% of people are usually laid off, instead. Resistance to lowered numeric wages is why moderate amount of inflation are typically considered a good thing: workers will more often accept less or no increase than they will an actual drop.
Please don't split hairs on a hypothetical example, it misses the point. You could achieve the same effect with no raise but high inflation. It's irrelevant to the point that the amount someone is earning directly influences how much they are spending.
I even heard it here that that’s it, recession is a sure thing. This or that indicator flipped and it’s all over. Heard people talk about it around town. I debated moving my retirement investments around even. But a voice in the back of my head was telling to not bother, since there is always someone saying the big crash is going to happen next week. And eventually it will happen, but probably not next week...
Exactly. Two pieces of advice, from investing great Jack Bogle:
1) "Nobody knows nothing." This means nobody can predict what's going to happen. Nobody.
2) Pick your asset allocation and "Stay the course". This means determine how much risk is appropriate for you, invest in an appropriate portfolio, and don't deviate from your plan.
Follow these two (and maybe a few more), and prosper.
yeah, the thing is NOBODY knows. If anybody ever knew the market was going down, they'd keep it a secret and short it. And if they KNEW it was going up they'd keep it secret and buy.
A good thing to keep in mind while the "experts" are bombarding you with their theories.
Markets are feedback driven. If enough people believe there will be a recession there probably won't as the recession will already be priced in.
If on the other hand everyone starts saying "it's different this time!" that means it's time to run for the hills and start stockpiling canned food and shotguns.
Funny, I had the opposite voice in my head telling me I needed to definitely take my money out, even though I was sure at least a portion of the predictions about yield curves was hype and people making noise to get attention/clicks.
My intuition seems to think that even if the market recover/gain some more in the near term, it's not going to go much further before hitting a correction/recession. In addition there is simply too much uncertainty around Brexit, Trump, Iran/Saudis, China/Hong Kong, climate-driven black swans, tech bubbles (e.g. AI, blockchain).
I ended up taking money out at the end of July and am not sweating my decision, even though we've recovered about what we lost in August at this point. This shit is a house of cards, I don't have a problem missing out on marginal gains if it means avoiding a major crash.
There is a bullish thesis for everything you described.
Trump? Strongly suggesting that the US push yields lower, and the only tool it has to do that is by adding more money into the market. Fueling the nonstop 30-year bull market in treasuries and other government bonds, before fueling the excess capital flows into every other asset.
Iran/Saudis? Epic Oil Boom Town of unprecedented proportions with coastal US and middle america being the primary recipients.
Tech bubbles? A by product of excess money added to the markets, see the 'Trump' entry.
China/Hong Kong? What? You gotta really re-evaluate how relevant that situation actually is. Everyone's had plenty of time to deleverage their exposure to that city, and nobody is going to get involved. The surrounding megacities in Guangzhou have all the output now. HK is 3% of China's GDP and has been functioning as an administrative convenience to circumvent customs duties, for years. Sorry about the people, it has nothing to do with the global markets. China itself is an accounting basket case though, but thats always been the case and not a new issue for your portfolio.
Brexit? Britain's problem more than anybody else, people have had even longer to deleverage exposure there, and its a slow motion train wreck that the whole rest of the EU has already moved on from.
Climate black swans? Well you got me there. The whole point of a black swan is something not being in the model. This is always true and not quantifiable, you either have the appetite or not.
You make all good points and seem to have way more knowledge than I do on these points.
I'm a complex systems person though, and it's the interactions between all these things which has spoiled my appetite.
I'm not saying I'm right or that anyone should follow my lead, simply pointing out that these things, taken as a whole, makes the future seem very uncertain and leads me to side with the more cautious camp.
It's fair. I don't know what anybody is going to do. But lending hasn't dried up and interest rates will be lower than ever letting businesses roll over any maturing debt for some time.
If people collectively decide to stop buying that stuff then yeah you'll get your crash, distressed companies, and massive layoffs. but with the European Central Bank starting up QEternity and the Federal Reserve about to start to QE4eva, they're going to be pumping all debt and holding it to maturity...
Yep, came here to say essentially this with regard to the Central Banks. I have to wonder if Central Bankers are feeling more and more politicized these days, and will now employ these "creative" options without regard for any long term consequences - whatever those may be.
> I have to wonder if Central Bankers are feeling more and more politicized these days
I don't think the big ones feel anything. (Fed, ECB)
ECB's frontman was a Goldman Sachs alumni, accountable to no one, doing private placements with his buddies, issuing corporate bonds directly to the ECB instead of the ECB picking them up on the secondary market.
The US Fed gets a chairman to just the Board of Governors, who is more accountable to the other people on the board of governors, and then the actual Federal Reserve. They are not accountable to the US President or the American people in any capacity.
They transcend administrations and are completely divorced from main street rhetoric. They don't care and don't have to. They emerge from their screens a few times a decade and say "huh, there's new pronouns now" and go back to resource management monopoly that they've been playing for 100 years.
> and will now employ these "creative" options without regard for any long term consequences
I think so, when you look at the incentives. The consequences are very few: there is a risk that the people are disillusioned by how resources are distributed since not everyone has to exchange labor or capital for resources (ECB buying newly issued bonds for billions of euros that didn't previously exist). there is a risk of hyperinflation if there is a real disruption in the need for the monetary union's currency, but uncontrollable need to inject more of the currency into the market.
In the mean time, they can keep assets on their balance sheet forever, with only a slight embarrassment if those assets cause losses (such a bonds that default).
Stocks are up because there is so much money around these days, and not a lot of places to put them. Bonds aren't paying, so don't put them there. Where else do you put your money?
There's also a tremendous amount of stock buy back happening, which means less money is being distributed to investors and more is being used to prop up the prices.
There's plenty of other places to put money though.
Why not keep a good chunk of cash around? During the 2017 ~ 2018 financial crisis, 1331 out of 1363 midcap+ stocks lost money. It was a great time to buy undervalued stocks that eventually benefitted from the longest recovery period ever, still going strong today. Even AIG, the villain that caused the crash and was bailed out by the government, was one of the top performers during the recovery.
The recession talk was mostly media-driven based on a few cherry-picked data points. Sure, they may be right...but they may be wrong. For whatever reason, every media outlet has been running with this lately.
I'm going to push back against this "let's blame the evil media for everything" view. The treasury yield curve inversion is one of the best indicators we have of an oncoming recession, even if it's not 100% accurate. To not report on that very important signal would have been negligent.
It definitely makes sense to report on the yield curve inversion; that certainly could be a possible indicator of a future recession. imo, It has really been taken to another level though with doomsday articles all over the place.
Most recessions are preceded by yield inversion, but a yield inversion may or may not lead to a recession. That’s where are the misleading information is coming from.
Edit: Idk why the downvotes. Yield inversions occur much more often than recessions therefore by necessity some yield inversions are preceded by another yield inversion instead of a recession.
"All recessions have been preceded by an inversion of the 2-10 year, but not all inversions of the 2-10 year have preceded a recession" is the phrasiology you're looking for.
“not all inversions of the 2-10 year have preceded a recession”
Since recessions are cyclical all inversions eventually lead to a recession. There haven’t been enough cycles to draw any sort of meaningful conclusions based on temporal proximity of the inversions to the recessions.
US has the strongest economy in the world and it’s obvious that it is going to grow since its main competitors (Europe, China, Japan) have declined. (Think market share increase and capital increase, in terms of a company)
The main two problems that faced US economy in the last 60 years - energy and jobs, have been solved by US. For energy, US is now the largest energy producer in the world. For jobs, US has climbed out of the hole of threats from globalization, increased internal labor force and automation, by using tariffs, deportations, border walls, upgraded workforce via increased education, and splitting threat from its main outsourced competitor China.
Well! Do more of the same! Obviously people are generally experiencing better lives, right? (No, actually they are not (US-focused).)
If the metrics are wrong or only partially focused, their meaning is less or non significant. There is ample recent evidence that only a narrow upper class is improving while the increasing lower class is dropping in terms of cost-of-living-adjusted income.
Germany and India are heading towards a recession. China's growth rate is slowing. If there is a global recession, I don't think U.S. can escape it. A lot of U.S. companies sell their products globally. Here is share of foreign revenue of some U.S. companies - Ford - 51%, Bank of America - 20%, Boeing - 41%, Amazon - 45%, McDonald's - 66%. Ford employs 85000 people in U.S. If Ford's global sales declines by 20%, they will close some U.S. plants and lay off employees. Even if just 20% of the companies in S&P 500 start laying off people, that will soon have a cascading effect. People who lost their jobs will stop spending. Even the people who have jobs will be afraid to spend on anything major - new houses, new cars, etc.
Sure, we might not hit a recession, there seems a decent chance we won't, but for every slightly positive benchmark cited in this article there's at least one negative, be it trends in car sales (especially new truck sales, which tend to be predictive) or a jobs report that looked positive only because it was propped up by thousands upon thousands of low-paid temporary Census workers. The positive indicators are, well, positive, but "trouncing" just raises the headline to the level of click bait.
If you want to get past the paygate to read this article, disable JavaScript for www.bloomberg.com.
> “the message is growth is slower, yes, but the risk of recession is grossly overstated. As long as the Fed continues to do the right thing” by cutting rates a couple more times.
Apparently a healthy economy is one the Federal Reserve manipulates by keeping interest rates as low as possible. How long can they keep this up?
Printing money and lowering intrest rates are the same lever. When they lower interest rates more people sell bonds. The Fed buys those bonds with printed money. When the Fed prints money they then buy something with it. When they buy bonds it lowers interest rates. They sometimes buy shares but that has the same effect.
If I took my money out of the market and braced for a recession every time the media reported economists were forecasting an imminent recession, I'd have missed out on tens of thousands of dollars in gains.
Eventually, the other shoe will drop, I'm sure, but hell, the Dow is floating around 27k. A little couple hundred point dip is just an opportunity to buy in at a discount.
I mean, you can tilt toward value or hedge your portfolio with options or something. I wouldn’t actually do the latter though, put options are pretty much always overpriced by at least 50% or more. Tilting toward value until the next election would be a reasonable move. Or you could try a 60/40 equity/bond portfolio.
Personally though, I just invest in a 3x leveraged S&P 500 ETF and roll with the punches. Unless there’s some cataclysmic event, that 3x leverage will almost always outperform the S&P, even with the volatility drag.
Says who? I hold them long-term at it works out very well. The only problem is the volatility tax you have to pay. Formula for volatility tax is:
actual returns = return - var(r) / 2
If the S&P 500 has a Sharpe ratio of one and say, a 10% mean yearly return and 10% vol, we first need to turn it into single day returns and volatility (since these leveraged products rebalance daily) so we get:
We can see that the S&P 500 3x leveraged is an excellent investment on a non risk-adjusted basis. On a risk-adjusted basis it's worse, the S&P 500 in the example having a Sharpe ratio of 1 while the 3x S&P 500 having a Sharpe ratio of 0.8499. But since you can't eat risk adjusted returns and it's going to be difficult for retail investors to get significant leverage to actually invest in good risk-adjusted portfolios, the 3x daily levered S&P 500 is a fantastic investment.
The prospectus of UPRO [1] : "returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period."
A recession is not an economic fact that magically happens when some predetermined values for some set of indicators are reached.
A recession will happen when there is a mix of two things: 1) a big financial/economic issue that affects an important sector of the economy (crisis), 2) widespread panic.
There are already multiple candidates for 1), but what hasn't happened is 2).
Why? That's anybody's guess.
My guess is Trump.
For people to panic, there needs to be sustained media coverage and focus. But now whatever Trump says is more important than anything else for the media.
If you look at the media since Trump became president, the most important issues have been all stuff related to his government, and whenever the media has focused on anything for too long, he's come out with some other thing that the media shifts their attention to.
So we've had lots of small panics, which by now have mostly desensitized the public.
If someone like Trump can continuously interrupt the media, they effectively control it through disruption, and then the media cannot focus for long enough on anything for people to fully panic and cause a full blown recession.
2008 and the ensuing recession happened because of an actual event (Lehman) and a credit crisis. I'd say those are 1 in your model. We haven't had anything of that magnitude yet, so I disagree that in today's economy condition 1 is satisfied.
That said, panic is a real component of crises and Trump's ability to shift focus could actually be a real asset, though it will be many years before historians and economists recognize it.
But consider Hyman Minsky’s theory that in capitalist economies stability engenders instability. It could be true, that good times plant the seeds of bad times, similar to the way that forests that go many years without fires, build up tinder.
