First, let’s talk about the inversion of the yield curve. What does it mean? Basically, it means the short-term rates are higher than longer term . Most market strategists and experts look at the 2-year Treasury vs. the 10-year treasury. Others may use short term variations. The yield curve inversion has historically been a big red warning sign that says “Danger, Recession Ahead!!!” The market typically predicts economic changes or swings 6 months to a year in advance. Historically, when the yield curve inverts, there is a possibility of a recession in 6+/- months into the future. This may be 5 months, or 18 months. The actual timing of the recession is unclear, but people start to panic when they see the yield curve invert.
Is this time different?
Nobody likes to talk about a recession. Optimists would like to think there won’t ever be one. Some people are saying this time is different. Why is it different? Well, it is different in a sense, due to the way the Fed had to intervene during the Financial Crisis by basically printing money. Many think the current rates are being artificially manipulated. Maybe, maybe not, but there is one thing I can say, and that is a recession is just a natural part of the business cycle. We can’t continue to think the market will keep going up and the overall economy will always be bullish. I would look at this inversion of the yield curve as a yellow light that says, “Proceed with Caution.” Not that we are going to have a market plunge or a major recession, but it’s a good time to evaluate your current situation.
What do I do now?
With the possibility of a slowdown, notice I said possibility, you may want to look at your time horizon. If you are within 5 years of retirement, make sure you aren’t too risky. Look at your allocations and talk to your advisor to make sure you don’t have anything too risky or out of alignment with your overall strategy. If you’re more than 5 years away from retirement, you should more than likely keep doing what you’re doing. For instance, if you’re putting into your 401K plan and investing in a target date fund, just keep doing that. It may be another 18 months before we see a recession. It’s important to continue contributing and dollar cost averaging into the market. If you are nervous, just talk to your advisor and reevaluate your game plan. There’s nothing wrong with that at all. The worst thing to do is panic. Warren Buffett looks at market sell offs as opportunities. He says “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.” He also has said, “The best chance to deploy capital is when things are going down.”
Use this inversion of the yield curve to get prepared. Talk to your advisor, make any adjustments you think are necessary based on your situation, and be ready to take advantage of a recession or sell-off. Even with a 401k, when the market sells off big, tell your HR administrator to withhold more from your paycheck that week or month to take advantage of the decline. Remember, recessions are just part of the business cycle, they should be looked at as opportunities to buy lower, you just have to be ready when those opportunities present themselves, and don’t panic when the selloff or recession comes.