Welcome to the 19th edition of my newsletter "Free As A Bird".
It is this risk that keeps investors in check and that keeps people from paying an infinite amount of money for shares in a business.
When you see the blood-red numbers in front of you on your screen, that panic you hear in people’s voices; those sights and sounds are the physical manifestation of the equity risk.
When nobody fears anything, stocks no longer work for investors’ long-term return needs.
It means that your goals don’t fluctuate with the market.
It means having a plan and sticking to it.
An Interesting Thing I Read This Week That Got Me Thinking
The balance of the macro data remains positive.
A recession starting in 2019 is unlikely, but, for the first time, a recession in 2020 is a rising possibility.
The bond market sees weakening growth. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years. The lag between inversion and the start of the next recession has been long: at least 7 months and in several instances as long as 2-3 years. Notably, the yield curve finally inverted in August; on this basis, the current expansion will likely last through 2019 but 2020 is now at risk.
Unemployment claims reached a 50 year low in April (just 4 months ago). Historically, claims have started to rise at least 7 months ahead of the next recession.
In July, housing starts rose 1% yoy, building permits rose 2% and new home sales rose 4%. In the past 50 years, a median of 28 months has lapsed between new home sales' expansion high (arrows) and the start of the next recession; so far, the cyclical high was in June, just 2 months ago, which suggests that the next recession is still ways ahead.
Why does any of this matter for the stock market?
Equity prices typically fall ahead of the next recession, but the macro indictors highlighted above weaken even earlier and help distinguish a 10% correction from an oncoming prolonged bear market.
On balance, these indicators suggest a recession starting in 2019 is unlikely, but a recession in 2020 is a rising possibility.
The simple fact is that when the economy is expanding, the historical risk of a greater than 10% annual (not intra-year) decline in the stock market is just 4% (see figure below).
What is for sure is that a recession is coming.
We don’t know when, so you should always stay prepared.
How do I stay prepared?
I’m 100 % invested in index funds.
If the market drops 50 % I won’t be scared, because I know that this is normal in a perfectly designed market.
In the long run, stocks will go up.
And if your perspective is 10, 15 or 20 years, then why the hell do you worry about what happens today, this month or even this year?
Always stay invested.
Recommended reading if you’re nervous in front of a possible recession:
”Why The Stock Market Always Goes Up”
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Quote that got me thinking
Golden words from Morgan Housel…
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Thanks for reading,
Route 2 FI