Roger Nusbaum submits: Today our fire department personnel completed our pack test. In order to be a wildland firefighter you need to be able to hike three miles in 45 minutes while wearing a 45 lbs. pack (this is a picture from last year's test).
The pack weighed me down but I was able to do what I needed to do.
As I was hiking, I wondered if there might be an analogy with the inverted yield curve weighing down the stock market. For now, stocks are doing what they need to do, the S+P 500 is up 3.3% year-to-date.
At some point, with the 45lbs. on, I would not be able to go any further. At some point, with the curve inverted, domestic stocks will not be able to go any further.
I do not know how far I could go wearing the pack. I do not know how long the market can keep chugging along with the curve inverted. Historically an inverted curve causes trouble six to twelve months out.
For now though, the curve, although inverted, is not inverted by that much based on historical standards. The inversion seems to be slowly getting steeper but I'm not sure if the consequence is that a slow down/recession will take longer to happen.
Inversion or not, it has been a long time since the last recession and if you still believe in economic cycles, then you have to believe a recession is somewhere on the horizon.
Recessions, from a market perspective, are not something to be feared because they are normal. Regardless of the timing, you already know that stocks will go down by some amount a little before GDP actually contracts (this is how it usually works), and then at some point before the recession ends stocks will start to work higher by some amount.
If you have a good idea of what it will look like, you can perhaps more successfully separate emotion from the mechanics of a recession's impact on the market and by extension, your portfolio.
Have some sort of trigger point in place to reduce equity exposure for when the next downturn comes. I would suggest making a plan now while the market is boring. I realize this is mostly repeated from past posts but it is reasonable human nature to be emotionally tied up in your portfolio.