A recession is two consecutive quarters of economic contraction. Historically, highly inverted yield curves like we have now are predictive of recessions. The 10 Year Treasury Bond interest rate has dropped from 4.3% at the peak to 3.5% currently, even as the Federal Reserve Board reinforces the idea that short rates will be taken above 5%. This has created very high short rates relative to longer-term rates reinforcing the recession predictions.
This raises two questions. First, has it paid historically to try to predict six-month stock market returns? In other words, can you benefit from fearing a recession? Second, are there simpler things for concerned investors to focus on to give them the ability to use the kind of five-year time frame that we prefer at Smead Capital Management?
To the first question, we always answer that it is fairly useless to try to predict the unpredictable. Nobody can predict short-term stock market returns (even though people never stop trying or reading the opinions of people who are paid to predict them). The other part of predicting a recession and altering your investments based on the prediction always leads us to ask folks this question. If your spouse was going to love you 4% less in the next year, would you divorce them? Most of us would be thrilled in a marriage with that slow of a decline in affection.
Therefore, since there is a very positive long-term bias to making money in common stocks, what are some reasons to stay the course despite the probability/possibility of a recession later this year? Also, how do the economic problems created by fighting against the economic difficulties of the COVID-19 pandemic affect which common stocks to own to get at the long-term benefit of equity ownership?