The Problem with Economic Forecasts

Do you remember what you heard in the financial news two years ago?  I certainly do. In March of 2022, the interest rate on the 2-year Treasury climbed above the rate on the 10-year Treasury creating what is known as an inverted yield curve.   

Articles and news stories like this one from CNBC - 2-year Treasury yield tops 10-year rate, a ‘yield curve’ inversion that could signal a recession - ran non-stop and offered up the following warning:   

"When the curve inverts, there has been a better than two-thirds chance of a recession at some point in the next year and a greater than 98% chance of a recession at some point in the next two years."

I bring this up now because the recession never happened and today we have articles like this one from Reuters that read:  

"A key bond market signal of an upcoming recession has flashed red continuously for the longest time ever, even if the U.S. economy is far from showing signs of a growth contraction."

Maybe the recession is still on the way or maybe the recession never comes at all, but either way, I am 100% sure the timing can’t be reliably predicted.  More importantly, whether we were or were not going to have a recession was never the issue. Nor will it ever be. The issue for your portfolio will always be how deep the recession actually goes, and how long it actually persists. And these two variables will always be entirely unknowable in advance. 

What I do know is that recessions happen about once every 6 years. And as I have written about before, trying to time the market based on recession expectations is typically a losing battle since stock prices generally fall sometime before the start of a recession and resume their climb higher sometime before the end. And, to make matters worse, the stock market has typically had some of the best returns in the twelve months coming out of a recession BUT you won’t know when the recession has ended until many months after the event. As long-term investors, we need to remember we own a portfolio of great companies that are doing great things, and missing out on the upside is a MUCH bigger risk than staying exposed to whatever happens in the short run. 

For this reason, when some economist or economic indicator is flashing a warning sign that suggests you sell, take that suggestion with a large grain of salt. Current events will always seem scary, and the future will always be uncertain. Given these truths, the only reasonable strategy is to tune out the noise and follow the financial plan.