Take the lead: Understanding recession indicators

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Advisors: Help your clients stay invested with a flexible approach that seeks to both defend and capitalize on opportunities as situations change.

The background

The prospect of recession has been on the mind of investors as slowing economic growth and the yield curve have flashed warning signs. But the fact is, the timing of recessions is difficult, if not impossible, to predict. Rather than trying to time a shift to cash, prepare for recession by maintaining a diversified portfolio with tactical flexibility.

How investors can approach concerns of a recession

  • Don’t just follow the yield curve.

Although an inverted yield curve generates a lot of headlines, keep in mind that the yield curve is just one of several indicators, and that it’s a somewhat simplified measure in many ways. Consider the broader gauges of recession risks, such as widening of credit spreads in bond markets or labor market indicators, and how those readings may affect your portfolio.

  • Don’t try to time the market.

Predicting recession accurately with the hope of dramatically reallocating assets is unlikely to be a successful endeavor. Rather than focusing on when, make sure you stay invested in a diversified portfolio that can flexibly adapt to varying growth and inflation environments.

  • Prepare by evaluating your portfolio positioning.

While it's natural for investors to focus on the probability of recession, it’s also important to understand the impact of changing interest rates or economic growth. By understanding the risks and rewards in these scenarios, you can position a portfolio based on these more tangible datapoints.