Reuters today released an article that clearly shows the economic trends towards a recession. We are just about hovering over the 40% chance now.
To sum up what the article is saying:
- The spread between the long-term and the short-term bond's yield curves is converging. This should not happen as short-term loans should always have lower interest rates than the long-term as the shorter terms generally mean less risk. However, the economy is worsening in the shorter term; we see a convergence in the rates.
- The unemployment rate spiked up.
- Consumer confidence has dropped significantly. People are spending much less money.
Lessons We Must Learn
Recessions come and go in different lengths. Unfortunately, many experts suspect that the next recession will be lengthy rather than short. Such a recession happens once in a decade, so it's rare. It is worth taking the time for us to learn what happened recently to prepare for the next one.
Immediately we saw the bubbles pop in the assets where people were the most greedy. These assets include growth stocks (tech stocks), cryptocurrencies and NFTs. When the assets' prices crash, it could only mean one thing and one thing only. The investors are doing nothing but selling, and it makes perfect sense for the sell-off to happen more dramatically in the highly speculative investments. After all, people who wanted to be rich quickly would likely be panicked to cover their losses just as fast. If you are one of these people who bought high and sold low recently, I've done the same in the last major recession. You need to take what happened as a learning opportunity and not repeat the same mistakes.
The recession doesn't last forever, and it usually ends in 6 - 24 months. We will inevitably enter the golden age again, where all the assets' values will increase. Investors will inevitably become greedy and start to take on many risks to get rich quickly. But as a veteran investor now who has gone through a major recession, you will not make the same mistakes. No matter how tempting and obvious an investment might be, you will remember the pain of losing money that you experienced. And you will maybe also start not to chase the highest possible returns all the time.
In case you are wondering what "not chasing the highest returns" gets you during the market downturn, even after the recent stock market crash, my dividend-paying stocks are up +4% YTD. They did come down but only about 5% since the market peak.