There is a lot of talk, or should that be a lot of noise, at the moment of recession. It has got some people very worried.
I guess some folks have good reason to be concerned. A recession could mean that the economic rebound, which many of us had expected to happen after the shock of a pandemic, could be short-lived.
If we think back to 2020, experts at the time were debating over the shape of post-pandemic recover. They included a V-shaped, U-shaped, W-shaped, and L-shaped rebound. Some had even suggested a Square-Root shaped recovery.
So, why are some experts forecasting recession now. Well, they point to the decline in bond yields for 10-year Treasuries compared to the yield on two-year notes. Generally, we would expect interest rates on those longer-term loans to be higher than 2-year Treasuries.
It stands to reason why they should be higher. If we are lending money for 10 years, we typically want to charge more in interest because anything could happen within a decade.
However, when the interest on long-term bonds are lower than short-duration loans, then the market believes that something awful could be on the horizon. It is what is known as the yield-curve inversion. In other words, the yields between the two types of bonds have inverted.
There is something else to think about. Banks generally borrow money in the short-term to lend over the long term. It works well when sort-term interest rates are lower than long-term interest rates. But when the yield curve inverts, banks could be less willing to lend. That could exacerbate, if not precipitate a recession.
Talk of recession can unnerve investors. Truth is recessions are perfectly normal. What’s more, we can’t control whether there will be a recession. But can control the stocks we choose to buy. So, focus on the things we can control rather than fret over the things we can’t.
The best placed stocks include those that have demonstrated strong pricing power, robust cash flow, and little or no debt. They should also be capable of paying dividends, preferably rising dividends.
If a recession should happen, and it is debatable if it would even occur, then it becomes increasingly important to focus on dependable dividend payers. Income investors are well versed with identifying reliable dividend-paying companies.
Some of the best sectors are consumer staples, pharmaceuticals, and utilities. But then, these sectors should always form the bedrock of any sensible portfolio.
If you’d like to learn more investing concepts, and how to apply them to your investing needs, sign up for our free investing education newsletter, Get Smart! Click HERE to sign up now.
Get more stock updates on our Facebook page. Click here to like and follow us on Facebook.
