If you’ve watched or listened to the news recently, you may believe a recession is inevitable in the next 12 months. Between the escalating trade war with China and slowing global growth, rumors of a recession are everywhere. Although the recent 2 year/10 year yield curve inversions have spooked the markets, Vanguard doesn’t expect a recession in the next 12 months.
According to Vanguard’s recent market prospective, all signs point to central banks lowering interest rates again in 2019, with the magnitude dependent on the shape of the yield curve. As seen over the years, interest rate changes have been an indicator of the state of the market. Thus, Vanguard puts the chance of a recession over the next 12 months at 40%.
Looking internationally, softening global growth is expected to continue over the next year which is driven by a slowdown in growth with Chinese economies and the high tension of the US-China trade war. In the euro area, Vanguard has lowered their forecasts slightly as manufacturing activity continues to contract.
Despite some signs pointing to a recession, Vanguard is optimistic that a recession will not occur in the next year. Although international news seems to be unfavorable, the US consumer is still holding strong with key market stability indicators including low unemployment rates, low inflation, lowering interest rates and good savings rates. These factors all contribute and continue to fuel our robust economy.
Even though downturns are typically associated with negativity, they are not rare market events since fluctuations have always been a sign of a healthy market. In fact, the typical investor will endure many market downturns in their lifetime. There has been at least one attention grabbing downturn every TWO years since 1980. Our advice if a recession happens, or with any market change, is to stay the course and avoid short-term market jitters.
One attention-grabbing downturn every two years:
Decline of 10% or more
8 bear markets
Decline of 20% or more, at least 2 months long
Source: Vanguard analysis based on the MSCI World Index from January 1, 1980, through December 31, 1987, and the MSCI AC World Index thereafter. Both indexes are denominated in U.S. dollars.