6 May 2022
Recession Indicator: US interest rate cycles
- Posted by Dejan Pekic BCom DipFP CFP GAICD, Senior Financial Planner
Economic history tells us that every time the United States begins a new interest rate hiking cycle a recession follows more than 50% of the time.
The same applies for Australia except that we have managed to avoid following the United States into a recession on 3 previous occasions.
Click for chart.
The United State has now started its 14th interest rate hiking cycle since 1955 and the question being asked is whether a recession will again follow in the United States.
Jerome Powell, Chair of Federal Reserve of the United States is saying that a recession is not coming and the increase in interest rates is required to slow down the rate of inflation.
Whether he is right or wrong should not be an investor’s focus.
Benjamin Graham taught that it is the buy price that matters when investing and today we are at correction levels becasue financial asset prices have fallen by 10% plus from recent peak and that is always a good time to buy.
Is it the best time to buy?
No, the best time is when we are at crash levels which is when financial asset prices have fallen by 20% plus from recent peak but they occur far less frequently and can be years away. For example, we had to wait 12 years after the 2008 Global Financial Crisis for the next crash which was 2020 COVID-19.
The point, there is a 10% plus financial asset prices discount on the table today and so yes, today is a good time to buy more.
If a recession does follow in the United State and or Australia due to this interest rate hiking cycle then it will become an even better time for investors to buy more because the discounted will be even greater.
WARNING, this does not constitute Personal Advice. To discuss if this is an appropriate strategy for your given circumstances please do not hesitate to contact us directly.
At Newealth we are always looking to support and promote our clients wherever possible and if you have any ideas or comments, please feel free to email me or to call me on +61 2 9267 2322.