You can be a market guru and be able to predict the exact date and magnitude of a bear market reversal, and you may know exactly which sectors are going to explode after the next major rally begins, but hanging in through a recession is something even the cunning wizards on Wall Street struggle to do. Recovering the entire principle capital one has invested after a recession starts is a painful wait, and unsurprisingly does not offer any return whatsoever– you merely sit and wait for eons, hoping your money’s going to come home one day.
Casual and regular investors are a funny breed. They believe in windfall profits and get rich quick schemes. They don’t understand the cyclical nature of the stock market. And they believe in investing miracles– which exist but are very rare and seldom help a person record a profit trading or investing. As geopolitics and the global trade engulf the trading world with a host of problem, including the tumor-like disease of protectionism which looks to be spread in like wildfire throughout the current world, it is important for the newest breed of investors to accustom themselves to the symptoms of a recession. Here are a few:
- Make one country great again: Only one country- Protectionist trade policies are the killer disease of international trade, especially in a rapidly globalizing world, and it has always proven to be a deterrent to economic growth and good diplomacy. History provides us with countless examples of protectionist trade policies being implemented by countries and groups of nations looking to boost local industry– all it really does is draw the contempt of other nations. After the contempt follows a brutal economic beating that leaves the protectionist nation in dire financial state. Think of the Latin American economies under military leadership and the US right before the Great Depression. Trying to boost local industries, these nations had succeeded in burning through cash reserves at an alarming rate while stoking the fires for a debt crisis that would leave millions under the poverty line. The current world is similar in many ways; the US has adopted protectionist trade policies as it drags its ever continuous trade war with China, Britain is looking to gain ‘freedom from the oppressive EU’ through Brexit and Brazil is following in hot pursuit of the US’s economic agenda.
- The Good Old Yield Curve; don’t doubt Old Faithful- There are some market pundits out there claiming the reign of the yield curve is over. Trust me, it won’t be dead in a long time. Now, although the yield curve has not inverted, it is flattening at an alarming rate. Since the 1950s, inversions in the yield curve, which gages the yield of long term against short term bonds, has successfully predicted every single recession. When a yield curve flattens, it shows that investors are moving into more safer assets for a longer term. This suggests that the temperament to take risks in the financial market is all but gone, and this consequently results in major concerns over business operations and revenue growth. Ultimately, in the end, you have a hot mess in the markets where the market takes a massive dive down day after day with little chance of a rebound. The current difference between the 10 yr US bond yield and the 2 yr US bond yield has shrunk to under 0.5%. About a year, the difference was around 1.5%-2%. Thus, pay attention to the basics.
- That Louis Vuitton is under a 50-year mortgage- Consumer debt, especially in the US, has risen to unprecedented levels from the past. Although increased US consumerism is beneficial for global trade, the buildup of excess debt likely to go toxic in the future is a grim prospect. As spending becomes uncontrollable, consumers are slowly choking themselves to their financial deaths. In the next few years, a late portion of these consumers using credit cards to buy the Gucci and Louis Vuitton products are going to find themselves incapable of paying off their debt, setting the stage for a massive debt crisis that is going to punish corporate banks as well as consumers themselves. To combat this increase in spending, which has also caused US inflation to be higher than expected this year, the US Federal Reserve is continuing to hike interest rates. However, that is doing very little to curb further spending– free-flowing loans have intoxicated the modern American consumer, who, in general terms, is naive and negligent of rising debt.
However, let us not worry too much. The wolves of Wall Street have managed to play these times of financial hardship with a hand of aces every time, and they have managed to take advantage of these opportunities to gain a handsome financial return. Here are some tips to keep in mind to use the next recession to your advantage:
- What goes down must come up (at least in the markets): Instead of treating recessions as the start of an economic onslaught that will bring permanent ruin to the global and national economy, investors should adopt a more simplistic view– the markets are on sale, a hot sale. Essentially, investor panic selling during depressed markets drags the value of countless securities below their intrinsic value. This is a classic way to play the traditional value play on the equity markets. By identifying and investing in shares of solid companies with reasonable price/earnings ratios (for their sector), steady revenue growth and lucrative future potentials, long-term investors can set themselves up for massive gains in the coming years. However, when entering the markets during periods of high volatility, one must neglect the short-term price swings; by remaining calm and sticking to the fundamentals, long term investors should be confident in the financial potential of their investments. If an investor does not want to risk investing in specific companies due to uncertainties about their financial performance in the future, he or she can opt to invest in diversified index funds instead, which take advantage fo the general market trends. Index funds are also less susceptible to extreme volatility, but will generally deliver lower returns.
- Take cover in the safe havens of the greenback and the yen: Unsurprisingly, there is a huge outflow of capital from the stock markets during recessions as investors sell their more risky positions. However, a large portion of investors don’t simply stuff their bank accounts with cash. Instead, lots of capital from the stock markets enter the forex markets by being invested in stable currencies such as the US dollar and Japanese Yen. These two currencies are two of the most popular bomb shelters from the minefields that have become the markets. In fact, if invested during the correct time, it is also possible to generate a modest return on these stable investments as increased demand for them leads to increases in their values.
For now, slight bounces and dips in the market should be ignored by investors as the possibility of a deeper bear market(and possibly a recession) are still well and alive. Instead, attention should be paid to the coming January earnings seasons which will provide investors with a general overview of the financial health of the market. Earnings of tech companies, large banks, and large value companies should be studied in depth to formulate a viable investing action plan for the future– investing blindly right now is only throwing money into a slot machine (which are designed to make you lose). So, fellow investors, exercise caution, skip those technical charts for now and focus on the basics– they’ll reward you handsomely in a few years.