Hi, and welcome to The Motley Fool’s Bottom
Line series! In this episode, we’re going to take a look at a few signs that indicate
that the U.S. may be headed for a recession, and what that means for the U.S.
economy and the stock market. A decade ago, things were looking pretty dire.
In October 2009, the U.S. unemployment rate peaked at 10%. The Federal Reserve was scrambling
to incite calm in a very jittery stock market and U.S. economy. Just seven months earlier,
the Dow Jones Industrial Average, NASDAQ Composite, and broad-based S&P 500
all hit multi-year lows. But things have rebounded in a big way over
the past decade. We’re currently in the midst of the longest expansionary period for the
U.S. economy in recorded history. The unemployment rate is at a nearly 50-year low, and the Dow,
NASDAQ and S&P 500 have all hit record highs since the Great Recession. Unfortunately,
all good things must come to an end. Right now, there are a few red flags indicating
that there could be trouble ahead for the U.S. economy and the stock market.
The first red flag is the inverted yield curve. A yield curve and version happens when longer-maturing
bonds have a lower yield than shorter-maturing bonds. Generally speaking, short-term bonds
should have lower yields than long-term bonds. After all, if you’re giving up your money
for a longer period of time, you expect to be paid more for doing so. But over the past
couple of months, the two-year and 10-year Treasury note swapped places a few times,
with the two-year note bearing a higher yield than the 10-year, which is known as an inversion.
Every single recession in the U.S. economy since World War Two has been preceded by an
inversion of the yield curve — although, it’s important to note that not all yield
inversions have necessarily been followed by a recession. Nevertheless, inversions don’t
come about unless there’s some serious concern about the health of the U.S. economy.
A second concern for the economy is the current contraction in U.S. manufacturing. The Institute for
Supply Management releases its Purchasing Managers’ Index every month, which is a gauge
for how the manufacturing sector is doing in the U.S. In September, the PMI fell to
47.8%. That’s the lowest percentage it’s been since June 2009, and any reading
below 50 signals a contraction. There’s little doubt that the ongoing trade
war between the U.S. and China is the biggest headwind in this confidence collapse in manufacturing.
Peter Boockvar, the chief investment officer at Bleakley Advisory Group, recently said
that we have now tariffed our way into a manufacturing recession in the U.S. and globally. The U.S.
and China have been trying to work out a long-term trade deal for more than a year now,
with tariffs being imposed on and off for the past 15 months. There’s simply no quick fix to
the trade war, and the longer it lingers, the more U.S. manufacturing may suffer.
Lastly, history would suggest that the stock market and U.S. economy are primed for a recession.
Despite more than 10 years of expansion, there’s a good probability that a recession will happen
sooner rather than later. The U.S. has had 14 recessions over the past 90 years, or about
one every six and a half years. Even though the U.S. economy doesn’t stick to averages,
this long-term data is pretty clear that recessions are a natural and unavoidable part of the
economic cycle. We also know that stock market corrections are perfectly normal. In fact,
the S&P 500 has had 37 corrections of at least 10% since 1950. The bottom
line is that no matter what the U.S. economy has historically thrown at the
Dow, NASDAQ, or S&P 500, they’ve always bounced back stronger than they were before.
That’s why long-term investors continue to be rewarded for their patience.
Thanks for watching this video! Do you think the U.S. economy is headed for a recession
in 2020? Let us know in the comments below. If you liked this video, click the thumbs
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