Does Yesterday’s Market Drop Portend a Recession?
The Dow Jones Industrial Average (DJIA) experienced another jarring 800-point drop yesterday, roughly a 3% loss. The media attributes it to (1) the inversion of the yield curve and (2) the 0.1% decline in Germany’s GDP. Talk of an impending recession has ramped up. Most likely the questions on investors’ minds are “Is a recession imminent?” and “What should I do?”
Let’s address the yield curve inversion first. I wrote about this last year: https://www.cognizantwealth.com/2018/07/18/is-the-yield-curve-signaling-a-recession/. In brief, in the past a yield curve inversion has consistently signaled a forthcoming recession, but has provided no information on its timing or on its severity. If you pull out of the market too soon, you could potentially do worse than simply staying in.
What about Germany? It’s fair to assume that its economic slowdown is at least somewhat related to Trump’s extremely misguided trade war. I previously wrote about this as well: https://www.cognizantwealth.com/2018/10/30/will-trumps-trade-war-benefit-the-u-s-part-2/. Since it is unclear what Trump’s end game is, it’s impossible to predict any particular outcome.
At Cognizant Wealth Advisors we believe a recession is inevitable, if only as part of the natural business cycles that occur in a capitalistic economy. Ultimately it is investor sentiment that is the primary driver of market performance. Right now the growing degree of uncertainty is resulting in bigger daily and weekly market swings. At some point the majority of investors will believe the recession is upon us and a stock market downturn will play out. Its length and severity may to some extent reflect the politics of the party in power in Washington at that time, i.e. the willingness and ability of the government to prime the economic pump as the Obama administration did back in 2009.
What should you do? If your investment portfolio is diversified across numerous asset classes that do not all react the same way during a recession, and it is appropriately balanced between asset preservation and growth based on the needed funding for your future goals & lifestyle, then you’re already doing the right thing. Reacting to market ups and downs by selling and buying stocks or mutual funds would be the wrong thing to do. This is the time to ignore your emotions and keep focused on your financial plan. If you built it correctly you should have nothing to worry about.