Last week’s yield curve news sounded a siren that a US recession might be on the way – it’s generally considered a chief warning sign. If a downturn does materialise, however, it could be some time before it actually happens.
History shows that when a yield curve inverts it can precede a recession by 12-18 months – although there have been occasions when it’s happened sooner, taken longer, or not happened at all.
The big thing markets don’t like – perhaps even more than a recession – is a surprise. And this was no surprise. Markets knew it was coming and have been preparing for slower growth for some time.
Coutts also predicted a slower growth environment and our portfolios and funds have been well-positioned as a result. We’ve exited investments in riskier markets in favour of more defensive areas and raised our positions in government bonds, for example.
Lilian Chovin, investment strategist at Coutts, says: “Recessions sound like bad news and they can bring difficulties for individuals and companies as economic conditions tighten. But investors should keep in mind that we invest in markets, not economies. Economics can affect markets of course, but it takes time – and that means investors can mitigate much of the risk.
“The last recession we had, in 2008, was exceptionally severe and bad for investments. But the numbers show that markets, and a well-balanced portfolio, can still rise during a typical recession and even in the run-up to it.”
Stay invested, stay dynamic
Lilian stresses that “nobody knows exactly when the next recession will happen and nobody knows what markets will do when it does arrive”.
“Your best move as an investor is to stay invested and have a dynamic asset allocation within your portfolio or fund – tilted towards riskier assets in good times and safer assets in more challenging times,” he says. “That reduces the risk of large drawdowns.”
Always remember though, that past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in.