![\"US](\"https:\/\/www.interactivebrokers.com\/campus\/wp-content\/uploads\/sites\/2\/2024\/09\/COMM-pmi-presidential-elections-09062024.jpg\")
<\/figure>\n\n\n\nIf Harris takes office at a time when the business cycle is faltering, she\u2019ll face an uphill battle with a slowing jobs market, lagging home sales and a Federal Reserve caught between a rock and a hard place on interest rates. Geopolitical risks also continue to swirl in the background, creating even more uncertainty.<\/p>\n\n\n\n
But the U.S. isn\u2019t alone in this struggle. In August, the JPMorgan Global Manufacturing PMI fell to 49.5, an eight-month low. Out of 31 countries surveyed, 18 showed deterioration in manufacturing conditions, including those in the euro area and Japan. The slowdown isn\u2019t confined to our shores\u2014it\u2019s a global issue that could have ripple effects on trade, jobs and investment opportunities.<\/p>\n\n\n\n
Mixed Signals From The Sahm Rule<\/strong><\/h2>\n\n\n\nThe U.S. labor market has long been a source of strength for the economy, but it, too, is starting to send worrying signals. August\u2019s jobs report was underwhelming, and while the unemployment rate is still relatively low, the trend is going in the wrong direction. In July, the unemployment rate ticked up to 4.3%, which triggered what\u2019s known as the Sahm rule, a little-known but highly accurate recession indicator named after former Fed economist Claudia Sahm. As I discussed with you last month,<\/a> the rule has successfully predicted every U.S. recession since 1970, so when it\u2019s activated, people take notice.<\/p>\n\n\n\n![\"Real-time](\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\")
<\/figure>\n\n\n\nPayroll gains have also slowed over the past several months, and many economists expect that we\u2019ll see downward revisions<\/a> in the number of jobs added. All of this is happening as inflation remains a persistent thorn in the side of policymakers, complicating the Fed\u2019s job as it tries to balance controlling prices with avoiding a deeper slowdown in the economy.<\/p>\n\n\n\nSahm herself has expressed concern that the Fed might not be acting quickly enough to avoid a recession. \u201cThe Fed can no longer afford to move gradually,\u201d she said recently in an interview with Goldman Sachs.<\/a> \u201cTwenty-five basis point cuts would probably suffice to avoid the worst possible economic outcomes, but these cuts have to be delivered decisively, not gradually.\u201d<\/p>\n\n\n\nThe End Of The Yield Curve Inversion That Just Wouldn\u2019t Quit<\/strong><\/h2>\n\n\n\nOne of the most reliable recession indicators over the last 50 years has been the yield curve, and last week, it turned positive again for the first time in over two years. An inverted yield curve, where short-term rates are higher than long-term rates, has preceded every U.S. recession since the 1970s. This occurs because market participants, anticipating future rate cuts to combat a downturn, drive long-term rates lower.<\/p>\n\n\n\n
Typically, the spread between the 10-year and two-year Treasury notes is used to gauge this inversion. Before last week, the yield curve had been inverted for a staggering 783 consecutive days, the longest such period in U.S. history. Although the inversion has recently \u201cuninverted,\u201d meaning long-term rates are no longer lower than short-term rates, the damage may already be done.<\/p>\n\n\n\n<\/figure>\n\n\n\nHistorically, there\u2019s been about a 12-month lag on average between the first inversion and the onset of a recession. But this can vary. For instance, the curve first inverted in January 2006, roughly two years before the financial crisis began in 2008. If history is any guide, the prolonged inversion we just experienced could be setting the stage for another economic downturn.<\/p>\n\n\n\n
A 30% Decline In The S&P 500?<\/strong><\/h3>\n\n\n\nWhat does all this mean for investors? According to Peter Berezin, Director of Research at BCA, it may be time to rethink your portfolio strategy. Writing in the Financial Times, Berezin says that now may be the moment to rotate out of stocks and into bonds.<\/a> For the last two years, stocks have been the place to be, but with a recession potentially on its way, Berezin believes bonds will soon offer a better risk-reward balance.<\/p>\n\n\n\nIn a recessionary scenario, Berezin expects the S&P 500\u2019s forward price-to-earnings ratio to fall from 21 to 16, with earnings estimates dropping by 10%. This would bring the S&P down to 3,800\u2014an almost 30% decline from current levels. It\u2019s a sobering prediction, but one that can\u2019t be ignored, especially given the headwinds facing the global economy.<\/p>\n\n\n\n
The Fed\u2019s Next Move<\/strong><\/h2>\n\n\n\nThe Federal Reserve has been in a rate-hiking cycle for over two years now, but with economic data weakening, many expect that rate cuts are on the horizon. The first cut is anticipated to come at the September 17-18 FOMC meeting, with a reduction of 0.25% to 0.50%. While some might hope that this will stave off a recession, it\u2019s important to remember that rate cuts take time to filter through the economy.<\/p>\n\n\n\n
There\u2019s also the risk that the Fed could be too slow in its actions. Sahm, Berezin and others argue that decisive cuts may be necessary to avoid the worst outcomes. The longer the Fed waits, the harder it will be to reverse the course of a slowing economy.<\/p>\n\n\n\n
As always, I remain optimistic about the long-term potential of the U.S. economy, but the short-term outlook is uncertain. Now may be the time to reexamine your portfolio and prepare for the possibility of a slowdown. History shows that recessions are an inevitable part of the business cycle, but they can also present opportunities for savvy investors who are prepared.<\/p>\n\n\n\n
Stay focused, stay informed and as always, happy investing!<\/p>\n\n\n\n
—<\/p>\n\n\n\n
![\"Real-time](\"https:\/\/www.interactivebrokers.com\/campus\/wp-content\/uploads\/sites\/2\/2024\/09\/fredgraph-1100x375.png\")
<\/figure>\n\n\n\nPayroll gains have also slowed over the past several months, and many economists expect that we\u2019ll see downward revisions<\/a> in the number of jobs added. All of this is happening as inflation remains a persistent thorn in the side of policymakers, complicating the Fed\u2019s job as it tries to balance controlling prices with avoiding a deeper slowdown in the economy.<\/p>\n\n\n\n Sahm herself has expressed concern that the Fed might not be acting quickly enough to avoid a recession. \u201cThe Fed can no longer afford to move gradually,\u201d she said recently in an interview with Goldman Sachs.<\/a> \u201cTwenty-five basis point cuts would probably suffice to avoid the worst possible economic outcomes, but these cuts have to be delivered decisively, not gradually.\u201d<\/p>\n\n\n\n One of the most reliable recession indicators over the last 50 years has been the yield curve, and last week, it turned positive again for the first time in over two years. An inverted yield curve, where short-term rates are higher than long-term rates, has preceded every U.S. recession since the 1970s. This occurs because market participants, anticipating future rate cuts to combat a downturn, drive long-term rates lower.<\/p>\n\n\n\n Typically, the spread between the 10-year and two-year Treasury notes is used to gauge this inversion. Before last week, the yield curve had been inverted for a staggering 783 consecutive days, the longest such period in U.S. history. Although the inversion has recently \u201cuninverted,\u201d meaning long-term rates are no longer lower than short-term rates, the damage may already be done.<\/p>\n\n\n\n Historically, there\u2019s been about a 12-month lag on average between the first inversion and the onset of a recession. But this can vary. For instance, the curve first inverted in January 2006, roughly two years before the financial crisis began in 2008. If history is any guide, the prolonged inversion we just experienced could be setting the stage for another economic downturn.<\/p>\n\n\n\n What does all this mean for investors? According to Peter Berezin, Director of Research at BCA, it may be time to rethink your portfolio strategy. Writing in the Financial Times, Berezin says that now may be the moment to rotate out of stocks and into bonds.<\/a> For the last two years, stocks have been the place to be, but with a recession potentially on its way, Berezin believes bonds will soon offer a better risk-reward balance.<\/p>\n\n\n\n In a recessionary scenario, Berezin expects the S&P 500\u2019s forward price-to-earnings ratio to fall from 21 to 16, with earnings estimates dropping by 10%. This would bring the S&P down to 3,800\u2014an almost 30% decline from current levels. It\u2019s a sobering prediction, but one that can\u2019t be ignored, especially given the headwinds facing the global economy.<\/p>\n\n\n\n The Federal Reserve has been in a rate-hiking cycle for over two years now, but with economic data weakening, many expect that rate cuts are on the horizon. The first cut is anticipated to come at the September 17-18 FOMC meeting, with a reduction of 0.25% to 0.50%. While some might hope that this will stave off a recession, it\u2019s important to remember that rate cuts take time to filter through the economy.<\/p>\n\n\n\n There\u2019s also the risk that the Fed could be too slow in its actions. Sahm, Berezin and others argue that decisive cuts may be necessary to avoid the worst outcomes. The longer the Fed waits, the harder it will be to reverse the course of a slowing economy.<\/p>\n\n\n\n As always, I remain optimistic about the long-term potential of the U.S. economy, but the short-term outlook is uncertain. Now may be the time to reexamine your portfolio and prepare for the possibility of a slowdown. History shows that recessions are an inevitable part of the business cycle, but they can also present opportunities for savvy investors who are prepared.<\/p>\n\n\n\n Stay focused, stay informed and as always, happy investing!<\/p>\n\n\n\n —<\/p>\n\n\n\nThe End Of The Yield Curve Inversion That Just Wouldn\u2019t Quit<\/strong><\/h2>\n\n\n\n
![\"Yield](\"https:\/\/www.interactivebrokers.com\/campus\/wp-content\/uploads\/sites\/2\/2024\/09\/COMM-yield-curve-inversion-09062024.png\")
<\/figure>\n\n\n\nA 30% Decline In The S&P 500?<\/strong><\/h3>\n\n\n\n
The Fed\u2019s Next Move<\/strong><\/h2>\n\n\n\n