The term “inverted yield curve” has been a prominent fixture in society of late with talking heads and pundits using its re-emergence as a sign of an impending economic recession. Some are saying another recession like the one experienced in 2008 may be right around the corner, some are calling for drastic measures like divesting from the market, and others are saying it’s no big deal and to keep on keeping on. But which one is it? Should the American people be concerned with this inversion? Is a recession imminent? What can be done to mitigate the effects of a seemingly unavoidable recession? According to HCR Wealth Advisors, a wealth management firm based in Los Angeles, CA, the answer is a little more nuanced than a “yes” or “no,” but one thing is for sure, it doesn’t hurt to prepare.
Who is HCR Wealth Advisors?
HCR is a client-focused wealth management firm dedicated to providing clients with personalized wealth management and financial planning advice. They do this by building strong relationships and profound trust with their clients, some of whom have been with the firm for decades.
HCR focuses on transparency and honesty by being forthcoming about their fees and working in the best interest of their clients while helping them through some of life’s most financially challenging transitions, including marriage, divorce, retirement, and yes, economic downturns.
With the recent yield curve inversion tossing another challenge into the ever-complex world of finances, HCR‘s client-first focus is exactly what current and potential clients, and worried investors, need: a firm that will sit down with them, take a holistic view of their financial situation, and advise them on the best course of action moving forward.
To understand more about how HCR can advise clients in the time of an inverted yield curve, we first need to understand what an inverted yield curve is:
What is an Inverted Yield Curve?
A “yield curve” is the expected return from a set of different investments. Generally, investments get higher rates of return for longer terms, i.e., an investment of two-years will yield less than an investment of 10-years. The longer you’re willing to invest your money, the more you’ll be rewarded. When the yield curve inverts, these assumptions invert with it. A two-year investment begins to have higher yields than a 10-year investment. To determine the yield curve for the whole economy, economists look at Government notes and bonds, particularly the gap between the two-year bonds and the 10-year bonds, which is where the inversion recently happened.
Since 1955, an inverted yield curve has preceded every major recession in the United States. On average, there are about 22 months between the time yield curve inverts to the time that the recession hits. The yield curve inversion that caused the Great Recession of 2008 took place in December 2005.
Why does the inverted yield curve appear?
Yield curve inversions may happen during a weak economy when the government might try to secure lower-cost funds at shorter terms to kick start economic development. It can also occur when long-term bonds are being sold cheaply, meaning financial advisors expect the economy to slow down.
Does the Yield Curve Necessarily Mean Recession?
While it is true that every recent United States recession has been preceded by a yield curve inversion, not every yield curve inversion has been followed by a recession. In 1965 and 1998, the yield curve inverted but was not directly – within two years – followed by a recession.
(It’s important to note that the yield curve inversions of 1965 and 1998 were followed by recessions within the next five years, not within the next two years.) The yield curve is an indicator of health for the economy moving forward. It is not necessarily a perfect indicator of recession two years from now, though it often can be.
Things to Know About the Predicted “Recession”
A “recession” is defined as at least two consecutive quarters of economic decline based on the Gross Domestic Product (GDP). There are other contributing factors used to determine a recession, like employment rates, and job growth, but GDP is one of the main indicators. It’s important to remember that GDP can decrease even while certain sectors or businesses experience growth.
While we may know that a recession is coming in a couple of years, it isn’t always clear what the effects will be, which is where HCR comes in. The experts at HCR give their clients the ability to take a look at the big picture and build a plan moving forward.
It’s almost impossible to see what bubble is going to burst or what market is going to crash, which is why being prepared for a possible downturn is a good idea when hearing of an inversion. Significant life events are rarely planned and often financially challenging, and HCR understands that. Being even marginally prepared for an economic downturn can be incredibly beneficial, especially in the wake of a significant transition.
What the Inverted Yield Curve Could Mean for You
It’s important to remember that while a “recession” is bad for the U.S. economy overall, a recession can affect different people and different institutions – in 2008 it was the housing market, and in the early 2000s, it was the bursting of the dotcom bubble. Regardless of the state of your financial portfolio and your level of preparedness, the possibility of an upcoming recession isn’t something anyone wants to face.
While the inversion of a yield curve doesn’t guarantee a recession, it’s never a bad idea to prepare for what might be coming, which is something the financial professionals at HCR can help with. Here are some basic tips to help you through the yield curve inversion and potential upcoming recession:
Reading a few news stories about a predicted recession, especially with 2008 so fresh in the American psyche, can cause a lot of understandable worries and the-sky-is-falling rhetoric in the media, but making rash decisions like selling off a bunch of your long-term financial products and divesting in others is not a good move. Recessions are caused by a confluence of factors, and the effects of them don’t emerge for years to come. So yes, while you should be cautious and looking for safer places to keep your money, moving it around now could be a knee-jerk reaction. Take the time to sit and study the market with your team at HCR. Your Lead Advisor, Financial Planner, and Analyst will be able to outline a plan with you that keeps your best interests in mind. This plan will allow you to find the best way forward for you, your family, and your investments.
Have Sufficient Liquidity
The liquidity of any personal financial portfolio measures how mobile those assets are. Stocks, 401ks, and mutual funds generally don’t have a lot of liquidity because they aren’t immediately accessible. During a recession, illiquid assets can cost you a lot of money.
HCR’s advisors will likely tell you that it’s always a good idea to have enough cash and savings on hand to be able to cover expenses, make payments and smart financial decisions, especially in the lead up to a potential recession. HCR will sit with you and assess your finances. If you find that a lot of your money is tied up in investments that don’t have a lot of mobility, they can help you find some places to move your money so that it’s accessible when you need it.
Out of Debt and Out on Spending
When you know a recession is going to hit, it’s a good time to start paying down that debt and looking to cut down on spending. If you have the option, move resources to decrease the amount of interest that you’re paying. Again, these are not easy decisions to make, nor are they easy steps to take. When market growth slows, you can generally make more money by reducing your interest payments than you can by investing in positive interest stocks.
The Bottom Line
The inverted yield curve is a decent predictor of economic downturn, but it does not guarantee a recession within the next couple of years. It does, however, suggest a less-than-ideal level of economic strength which is as good a reason for you to sit with a firm like HCR Wealth Advisors.
It’s one thing to be told what to do; it’s another to have your financial advisors and analysts give you the focused time and attention you need to make the right decision and take the proper steps. HCR Wealth Advisors will not only give you personalized advice but will make sure you are set up to make it work and weather whatever big life event comes your way.
This article is provided for informational purposes only and should not be interpreted as investment advice. HCR Wealth Advisors is not affiliated with this website.
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