I Keep Hearing We're Nearing a Recession. Are We Nearing a Recession?

I Keep Hearing We’re Nearing a Recession. Are We Nearing a Recession?

There’s been more than a few news headlines recently claiming that we’re on the verge of an economic recession.  For many business owners and investors the word recession is a lot like Voldemort.  It’s so evil and scary that you’re not even supposed to say it.  “Recession” evokes fears of falling stock prices, unemployment, and scarcity.

So what exactly is a recession?  And should we treat them with the same respect that Harry Potter treats Lord Voldemort?

Recessions are technically two or more consecutive quarters where national gross domestic product contracts.  Gross domestic product (GDP) is sum of all the goods and services a country produces.  It’s the broadest and most common way to measure economic activity and the strength of the economy.  Growing GDP is a good sign, falling GDP is a bad sign.  This is what US GDP growth has looked like since 1930.  Lots of major swings between 1930 and 1950, and relatively steady since about 1985.  Note that by that time the US dollar was the world’s reserve currency, we were off the gold standard, and interest rates had started to stabilize after stagflation in the 1970s.

I Keep Hearing We're Nearing a Recession. Are We Nearing a Recession?

Now on to why you should care.  The more goods and services a country produces, the better off its citizens are financially.  There’s more wealth being created, more jobs available, and usually faster rising wages.  For businesses this means that your customers have more stable employment and more discretionary income to buy your products.

In a recession GDP contracts.  There’s less economic activity.  From a business’s perspective your customers have fewer jobs, lower wages, and less discretionary income.  Revenue dries up, and you may be forced to lay employees off yourself.  Times are tough.

From an investor’s perspective, recessions are tough on asset prices.  The value of your stock holdings, including index funds, depends on the market’s expectation of future cash flows & profitability.  Recessions are tough on cash flow, tough on profitability, and tough on stock prices.  Recessions often coincide with bear markets.

So where are we now?  Are we actually nearing a recession, or is the rhetoric we’re hearing on the news just propaganda?  I’m no economist, but I do have some background and stay informed as part of my day job.  Here’s my take on whether we’re nearing a recession.

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Q3 2019 Market Update

Market Update: Q3 2019

I’ve written and published quarterly market updates religiously since launching Three Oaks Capital Management back in 2014.  At first I had physical newsletters printed out on six thick pages of card stock, and mailed them out to clients and other contacts.  Shortly afterward I began adding the commentary to www.3oakscapital.com, and started calling the distribution “Investment Insights”.  A few years after that I abandoned the print version, and distributed the commentary solely through the blog.

Writing a market update at all is starting to become less common in the financial planning community.  Many of my peers, colleagues, and friends prefer NOT to publish or distribute market updates at all, as they believe it diverts their clients’ attention away from long term & consistent strategies.

The market updates I’ve written have evolved quite a bit over the years, but they’ve received a good amount of positive feedback all along.  Clients like to know my take on the markets, and feel comfortable knowing that I have my eye on them.  Other readers and contacts seem to enjoy the content too.

This quarter I am making a minor change to the format of Investment Insights.  While I plan to continue producing them, starting this quarter all new editions will live on Above the Canopy as opposed to Three Oaks Capital’s blog.  We have other changes to the blog, format, and site forthcoming, and this change makes the most long term sense.  (Hint: there is a podcast on the way).  But from here on out, you’ll find market updates on this site as opposed to Three Oaks Capital’s.

Speaking of this quarter’s edition, we have a number of items to touch on.  First, the Federal Reserve reduced short term interest rates in both of their third quarter meetings.  There continues to be a lot of trade uncertainty globally, inflation remains low, and there continues to be some weakness in global economic growth.  This is the first time the fed’s reduced rates in ten years – the last time being December of 2008, when it cut rates from a range of 75 – 100 basis points to 0 – 25.

Elsewhere, US equities had another strong quarter, value shares outpaced growth in the small cap space, and the yield curve in US rates inverted for three days in August.  Read on for more details.

 

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