Understanding The Economy When Investing

A recession is never far from most investors’ minds. Understanding risks such as slowing growth when investing is essential.

Signs of an economic downturn sometimes causes the markets to be turbulent as headline risk increases. Experienced investors look for recessionary signs to either endorse or dismiss. In any case, recessions cause declines in the stock market. Longer-term investors will ride through the market downturns.

4 Ways To Recognize A Potential Recession:

1. Mahalanobis Distance. What’s That?! This concept is hard enough to pronounce, let alone to explain.  A recent study using Mahalanobis Distance by MIT Sloan School of Management and State Street Associates points to a 70% chance of a recession in the next 6 months.

2. Inverted Yield Curve Typically, a standard yield curve reflects the length of maturities for a particular security, such as US Treasuries. A longer maturity will have higher yields for the added risk. Specifically, the ten year Treasury typically has a higher yield than the three month Treasury bill.

3. Velocity of Money Investors look at the velocity of money closely for signs of slowing consumer spending. The calculation of the velocity of money is a ratio of Gross Domestic Product (GDP) to a country’s money supply.

4. The Coronavirus Overhang There have been many viruses, which are human tragedies for many. However, they have not been overly harmful to the stock market as seen in these charts. Still, investors learned this virus is more severe, causing still high unemployment. The optimism of effective vaccines is helping the market to outperform now.

7 Tips For Investors Learning About The Relationship Between The Economy And The Markets

1. Be Informed About The Business Cycles Like any investor, I want to understand the general economic outlook and potential problems on the horizon like a recession, rising interest rates, and consumer spending.

3. Understand How To Reduce Risk All investments involve risk. Find where your comfort zone when considering taking on your bet. Your risk tolerance and mix of assets may change at different life stages.

4. Add To Your Tax-Advantaged Retirement Accounts Your retirement accounts are tax-advantaged, which are different than your taxable investment accounts. You can lessen your taxes for investment accounts by using a buy-hold strategy.

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