Before we dig into the data, I want to offer a word of warning. If you wait for the headlines that the economy is in a recession, it will be too late. Below are two examples of this…
1. On February 14, 2020, I warned in my blog (click to access it) that Apple, and many other companies, were going to miss their earnings guidance. That was just a few days before the S&P500 hit an all-time high. On February 17, 2020, Apple issued a statement that they would miss their guidance. Between February 20, 2020 and the end of the month, stocks dropped over 12.4%. Over 100 companies in the S&P500 have gone on to state that they will miss their earnings projections.
2. On December 27, 2007, we warned that the economy was headed for a very deep recession, and encouraged everyone to overweight 20% safe, in addition to keeping a percentage equal to their age safe, in their nest egg. The market high was in October of 2007. Between the high and the low of September 9, 2009, the Dow Jones Industrial Average lost 55%. Most Americans were unaware of how deep and costly the Great Recession would be, until they had already lost half. The politicians didn’t admit we needed a bailout until October of 2008.
The big questions on everyone’s mind today are: “Will things get even uglier? Are we headed into a recession? Will the stock market losses this time around be as terrible and terrifying as the last time?”
Again, if you wait for the headlines, it’s too late. What does work is reading the data. So, here’s the crystal ball reading, by the numbers. If the explanation puzzles or confuses you, just scroll to the end for the summation.
Below are 7 Recession Indicators, all of which portend bad news.
1. Moody’s Warning.
2. Emergency Rate Cut of 50 Basis Points.
3. Worst 12-Day Move.
4. Inverted Yield Curve.
5. Executive Exodus.
6. Earnings Warnings.
7. Manufacturing Recession.
And here is a little more color on each point.
1. Moody’s Warning. On March 6, 2020, Moody’s Investors Services issued a warning that Global Recession Risks had risen. In particular, a sustained pullback in consumption and store/factory closures would “hurt earnings, drive layoffs and weigh on sentiment.” Since that alert was published, Italy has locked down the northern part of the country. Major conferences have been postponed. Cities are encouraging their citizens to stay at home and away from social contact.
In truth, this is a flu virus. So, the crisis should start abating at some point over the next few months. However, the damage of having the entire world on lockdown during the first quarter of 2020 will ripple throughout the global economy.
2. Emergency Rate Cut of 50 Basis Points. The last time that the Federal Reserve cut rates by 50 basis points was in December of 2008 – just before General Motors and Chrysler declared bankruptcy. The market bottom in the Great Recession occurred just three months later, on March 9, 2009.
3. Worst 12-Day Move. The loss of 12.4% between February 19, 2020 and March 6, 2020 was one of the worst 12-day moves that the markets have seen. Other terrifically bad 12-day moves happened in 2011, in 2009 (multiple times) and in 2008. What I find interesting is that none of the downturns have triggered a halt in trading. That tells me that the sell-off is from Wall Street insiders who are strategically selling with a plan not to trip the halt trading switch. The “smart money” tends to move first. Main Street tends to wait for the headlines before reacting, which is always too late.
4. Inverted Yield Curve. An inverted yield curve is 100% correlated with recessions, since the 1980s. The grey bars below mark the recessions.
5. Executive Exodus. Since the coronavirus outbreak was announced, we’ve seen an executive exodus. This is always a bad sign. Bob Iger suddenly decided that he’d give his job as CEO up, but remain the executive chairman (essentially the boss of the new CEO). That ensures that Iger keeps his stellar track record of increasing Disney’s market capitalization five-fold under his tenure, largely through the acquisitions of Pixar, Marvel, Lucasfilm and 21st Century Fox. Iger is going out on top.
Steve Ells, the chairman and founder of Chipotle, announced on March 6, 2020 (Friday) that he would step down as executive chairman of Chipotle. Ells is going out on top, too.
According to Business Insider, January 2020 set a record for the most CEO departures in one month, at 219. Other companies where executives are leaving their offices include Hulu, Tinder/Match, MedMen, Salesforce, IBM, LinkedIn, Mastercard and more.
6. Earnings Warnings. Apple, Microsoft and over 400 companies have warned that the coronavirus will impact their 1st quarter earnings. Which industries and companies will be the hardest hit? Read my Coronavirus blogs.
7. Manufacturing Recession. Manufacturing has been in a recession since mid-2019. Boeing’s 737 Max problems are hitting the manufacturing industry very hard.
Spring Rally 2020
It’s important to remember that it takes two quarters of negative growth for the economy to be declared in a recession. That means that if we enter a recession in the first quarter, it won’t be proclaimed until July 30, 2020. That is one of the reasons why there could still be a Spring Rally in stocks between now and April. We have seen ample indicators of a dramatic slowing of the worldwide economy, and plenty of reasons to suspect that we’ll have a very ugly GDP showing in the 1st quarter. However, the results won’t be announced until April 29, 2020.
Additionally, accelerated buyback plans were announced recently by AT&T and Citrix. Apple has been repurchasing up to $80 billion a year of its own stock. This bull market has been largely fueled by companies borrowing money very cheaply and then buying back their own stock. Even the beleaguered Boeing company, with 737 Max planes grounded, repurchased almost $3 billion of its own stock in 2019 (though the two most recent quarters have all but halted the buybacks). With a real crisis, like the coronavirus is posing, prudent management has to consider utilizing cash flow for operations, rather than financial engineering, so this could put a stop to buybacks. It could also be why the drop has been so severe and sudden.
Forecasters are still projecting GDP growth at this time. However, they are including a lot of caveats and warnings in the statements. China is still predicted to grow by 4.8% in 2020, with the U.S. GDP growth projections at 1.5% (source: Moody’s).
The Bottom Line: How to Survive a Recession.
It’s always a smart plan to keep a percentage equal to your age safe. Overweighting safe when there are 7 recession indicators flashing red is prudent as well.
In today's world, you also need to know what is safe. 50% of corporate bonds are at the lowest rung, just above junk bond status. GE & Ford are not the only companies that have borrowed money to buyback their own stock (making their executives rich). Also, money market funds have redemption gates and liquidity fees. I'm listing blogs below that address all of this. However, if you want to get safe now, consider receiving a 2nd opinion from me.
If you’d like to see what a personalized sample nest egg pie chart looks like, just email info@NataliePace.com or call 310-430-2397 to access our free web apps. If you’re interested in knowing exactly what you own, how much at risk you are for losses, and what you can do to protect your wealth, then consider getting an unbiased 2nd opinion on your current financial plan. Call 310-430-2397 or email for pricing and information.
Other Blogs of Interest
Corona Virus Update.
The Bank Bail-in Plan on Your Dime.
NASDAQ is Up 6X.
CoronaVirus: Which Companies and Countries Will be Most Impacted.
Is Tesla Worth GM and Ford Combined.
Artificial Intelligence is on Fire. Is it Time to Buy S'More?
Take the Retirement Challenge.
2020 Investor IQ Test.
Answers to the 2020 Investor IQ Test.
Win a Seat at a Retreat
The Cannabis Capital Crunch and Stock Meltdown.
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2020 Crystal Ball.
The Benefits of Living Green. Featuring H.R.H. The Prince of Wales' Twin Eco Communities.
What Love, Time and Charity Have to do with our Commonwealth. Interview with MacArthur Genius Award Winner Kevin Murphy.
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The Dow Dropped Over 1000 Points
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Do We Talk Ourselves into Recessions? Interview with Nobel Prize Winning Economist Robert J. Shiller.
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Ford is Downgraded to Junk.
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The Manufacturing Recession. An Interview with Liz Ann Sonders.
Gold Mining ETFs Have Doubled.
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The We Work IPO.
The Highs and Hangovers of Investing in Cannabis.
Recession Proof Your Life.
China Takes a Bite Out of Apple Sales.
Will the Dow Hit 30,000? A Check Up on the Economy
Red Flags in the Boeing 2Q 2019 Earnings Report
The Weakening Economy.
Think Capture Gains, Not Stop Losses.
Buy and Hold Works. Right?
Wall Street Secrets Your Broker Isn't Telling You.
Unaffordability: The Unspoken Housing Crisis in America.
Are You Being Pressured to Buy a Home or Stocks?
What's Your Exit Strategy?
Will the Feds Lower Interest Rates on June 19, 2019?
Should You Buy Tesla at a 2 1/2 Year Low?
It's Time To Do Your Annual Rebalancing.
Cannabis Crashes. Should You Get High Again?
Are You Suffering From Buy High, Sell Low Mentality?
Financial Engineering is Not Real Growth
The Zoom IPO.
10 Rally Killers. Fix the Roof While the Sun is Shining.
Uber vs. Lyft. Which IPO Will Drive Returns?
Boeing Cuts 737 Production by 20%.
Tesla Delivery Data Disappoints. Stock Tanks.
Why Did Wells Fargo's CEO Get the Boot?
Earth Gratitude This Earth Day.
Real Estate is Back to an All-Time High.
Is the Spring Rally Over?
The Lyft IPO Hits Wall Street. Should you take a ride?
Cannabis Doubles. Did you miss the party?
12 Investing Mistakes
Drowning in Debt? Get Solutions.
What's Hot in 2019?
The Debt Ceiling Was Hit (Again) on March 1, 2019.
How Bad Will the GDP Report Be?
2019 Investor IQ Test
The State of the Union
CBD Oil for Sale.
The High Cost of Free Advice.
Apple's Real Problem in China: Huawei.
2019 Crystal Ball.
2018 is the Worst December Ever.
Will the Feds Raise Interest Rates? Should They? Learn what you're not being told in the MSM.
Why FANG, Banks and Your Value Funds Are in Trouble.
When the Santa Rally is a Loser, the Next Year is a Bigger Loser.
Russia Dumps Treasuries and Buys Gold
OPEC and Russia Cut Oil Production.
Please note: Natalie Pace does not act or operate like a broker. She reports on financial news, and is one of the most trusted sources of financial literacy, education and forensic analysis in the world. Natalie Pace educates and informs individual investors to give investors a competitive edge in their personal decision-making. Any publicly traded companies or funds mentioned by Natalie Pace are not intended to be buy or sell recommendations.
ALWAYS do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies. Investors should NOT be all in on any asset class or individual stocks. Your retirement plan should reflect a diversified strategy, which has been designed with the assistance of a financial professional who is familiar with your goals, risk tolerance, tax needs and more. The "trading" portion of your portfolio should be a very small part of your investment strategy, and the amount of money you invest into individual companies should never be greater than your experience, wisdom, knowledge and patience.
Information has been obtained from sources believed to be reliable however NataliePace.com does not warrant its completeness or accuracy. Opinions constitute our judgment as of the date of this publication and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.
Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The Power of 8 Billion: It's Up to Us, The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She is a repeat guest & speaker on national news shows and stages. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.