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.
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