The Bellwether of the Next Bear Market Recession
One of the most critical survival items in the most accessible pocket of the winter mountaineer’s pack lies a pair of goggles. Experienced climbers understand once the goggles are put on, it’s a matter of time before they freeze, the point at which climbing becomes surviving blind. For this reason, goggles are never used prematurely, and are a harbinger of life-threatening conditions; they are the final, high alert warning, and the opening bell for a ticking clock. What single economic development most dependably warns attentive investors of extreme and imminent market danger? What might a prudent response look like?
A tightening credit market occurs when lending institutions perceive an economic slowdown, and respond by tightening loan requirements and demanding more interest from borrowers. Fewer, more expensive loans send heavily-indebted corporations into financial hardship, which causes layoffs, which reduces consumer spending, which craters the stock market and introduces economic contraction; for this reason, a tightening credit market is ‘the’ bellwether of a bear market recession. One strong indication to the mountaineer the goggles must ‘come out’ is getting pelted in the eyeball with flying ice particles. What two early indicators warn tighter credit looms, and what are these indicators saying today?
Copper is used in the production of a wide array of products throughout the global economy, which is why its price and price trend accurately convey macro-economic conditions and sentiment, and therefore, the state and direction of the credit market. Copper is presently in a raging bull market with no indication of slowing down.
An earlier indicator than copper of economic and credit market trouble is an inverted yield curve, which has preceded 6 of the last 7 recessions over 60 years with a single false positive.¹ The yield curve is flattening noticeably, but is inverted only between the 20 & 30 Year Treasury Bonds.
These two credit market indicators suggest the economy is on solid ground, confirming other economic reports like unemployment, GDP growth, and corporate earnings. Keep in mind a war-driven supply shock in an existing 40 year high inflationary environment can swing the economic pendulum far faster than is ordinarily the case, so stay nimble and alert.
Prudent posturing might include:
Buying capital-efficient, dividend aristocrats when attractively priced
Owning a chaos hedge or two
Carrying a stronger cash position than usual
Concentrating on assets and businesses with a strong, established income stream, and the ability to pass higher costs on to the consumer
Reducing ownership of assets and businesses with no present income stream, especially those without near-term profitability.
Think about it, Shaun.
“Give a portion to seven, or even to eight, for you know not what disaster may happen on earth.” ~Ecclesiastes 11:2
“It’s far better to buy a great company at a fair price than a fair company at a great price.” ~Warren Buffet
1 Union Bank, Market and Economic Outlook, “Understanding the Inverted Yield Curve: The Basics”, September 24, 2019
The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.
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