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  • Hi, and welcome to The Motley Fool's Bottom Line series.

  • In this episode, we're going to take a look at a few signs that indicate that the U.S. may be headed for a recession.

  • And what that means for the U.S. economy and the stock market.

  • A decade ago, things were looking pretty dire.

  • In October 2009, the U.S. unemployment rate peaked at 10%.

  • And the Federal Reserve was scrambling to incite calm in a very jittery stock market and U.S. economy.

  • Just seven months earlier, the Dow Jones Industrial Average, Nasdaq Composite, and broad-based S&P 500 all hit multi-year lows.

  • But things have rebounded in a big way over the past decade.

  • We're currently in the midst of the longest expansionary period for the U.S. economy in recorded history.

  • The unemployment rate is at a nearly 50-year low, and the Dow, NASDAQ and S&P 500 have all hit record highs since the Great Recession

  • Unfortunately, all good things must come to an end.

  • Right now, there are a few red flags indicating that there could be trouble ahead for the U.S. economy and the stock market

  • The first red flag is the inverted yield curve.

  • A yield curve inversion happens when longer-maturing bonds have a lower yield than shorter-maturing bonds.

  • Generally speaking, short-term bonds should have lower yields than long-term bonds.

  • After all, if you're giving up your money for a longer period of time, you expect to be paid more for doing so.

  • But over the past couple of months, the two-year and 10-year Treasury note swapped places a few times, with the two-year note bearing a higher yield than the 10-year, which is known as an inversion.

  • Every single recession in the U.S. economy since World War Two has been preceded by an inversion of the yield curve

  • Although it's important to note that not all yield inversions have necessarily been followed by a recession.

  • Nevertheless, inversions don't come about unless there's some serious concern about the health of the U.S. economy.

  • A second concern for the economy is the current contraction in U.S. manufacturing.

  • The Institute for Supply Management releases its Purchasing Managers' Index every month, which is a gauge for how the manufacturing sector is doing in the U.S.

  • And in September, the PMI fell to 47.8%.

  • That's the lowest percentage it's been since June 2009, and any reading below 50 signals a contraction.

  • There's little doubt that the ongoing trade war between the U.S. and China is the biggest headwind in this confidence collapse in manufacturing.

  • Peter Boockvar, the chief investment officer at Bleakley Advisory Group, recently said that we have now tariffed our way into a manufacturing recession in the U.S. and globally.

  • The U.S. and China have been trying to work out a long-term trade deal for more than a year now, with tariffs being imposed on and off for the past 15 months.

  • There's simply no quick fix to the trade war, and the longer it lingers, the more U.S. manufacturing may suffer

  • Lastly, history would suggest that the stock market and U.S. economy are primed for a recession.

  • Despite more than 10 years of expansion, there's a good probability that a recession will happen sooner rather than later.

  • The U.S. has had 14 recessions over the past 90 years, or about one every six and a half years.

  • Even though the U.S. economy doesn't stick to averages, this long-term data is pretty clear that recessions are a natural and unavoidable part of the economic cycle.

  • We also know that stock market corrections are perfectly normal.

  • In fact, the S&P 500 has had 37 corrections of at least 10% since 1950.

  • The bottom line is that no matter what the U.S. economy has historically thrown at the Dow, Nasdaq, or S&P 500, they've always bounced back stronger than they were before.

  • That's why long-term investors continue to be rewarded for their patience.

  • Thanks for watching this video!

  • Do you think the U.S. economy is headed for a recession in 2020?

  • Let us know in the comments below.

  • If you liked this video, click the thumbs up button and hit subscribe.

  • It helps us to reach more people, which allows us to make more awesome content.

Hi, and welcome to The Motley Fool's Bottom Line series.

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