The Azucena Take: Risks of a Recession

With the Federal Reserve announcing they will be raising interest rates to combat inflation, there have been talks about a possible recession. With all that is going on, investors will be asking themselves if a recession is on the horizon and what can they do to protect their assets.  

Let's get the obvious out of the way, is a recession coming? The short answer is that nobody actually knows. There could be a recession but nobody knows for sure. Anyone who says it will definitely happen is as reliable as a broken clock. A smart investor should ignore all the clickbait headlines from trash tier outlets. 

Most investors will be looking at yield curve inversion, this is when short-term debt instruments have a higher yield than long-term debt instruments of the same credit risks. Particularly; investors will look at the 10-year spread vs. the 2-year spread or the 10-year vs. the 3-month spread. One did happen not too long ago but for a very short moment. Also; this is not a bulletproof detection strategy as there have been false positives in the last 20 years.   

As of 4/4/2022: the 10-year is at 2.32% while the 3-month is at 0.53% (up by +180 BPS overall). 

Instead, investors should be looking at how the market will react to rising interest rates. There have been concerns that if the Federal Reserve raises interest rates, this could create a volatile market. Thus it could lead to a minor recession. It won't be like the 2008 Crash or the COVID-19 recession of 2020, but more like the recession of the 90's. Also, there might not be a recession at all by these actions.

The big takeaway for investors should be not to hyper focus on something that might or might not happen. Inflation and rising interest rates should be an investor's top concern at the moment. Regarding the possibility of a recession, one needs to position themselves in a way that the hit does little damage in both the short and long term.  

The Azucena Take provides an inside look into the investment real estate market using the research done and data collected by Marcus & Millichap.