Remember: Not all recessions turn into 2008

Iryna Kirby

“Recession” is a scary word that sends everyone from Wall Street professionals to Main Street consumers into a terrifying flashback of the 2008 financial crisis. But a J.P. Morgan strategist says people shouldn’t be afraid of the next recession because it’s “normal.”

“There is so much anxiety out there right now, and I think so much of that has to do with the fact that what happened in '08 was so historically bad that people are absolutely terrified of the next recession when they don't really have to be,” J.P. Morgan Asset Management Global Market Strategist Jack Manley told Yahoo Finance’s The Final Round.

Manley believes that there could be “a great psychological impact” if we get another recession under our belts.

“We remember that not all recessions are 2008, not all bear markets are the dot com bubble bursting or a global financial crisis,” Manley said. “A recession is literally part of a business cycle. It's normal. It happens.”

Recession fears are growing

Wall Street fears that the U.S. is headed for a recession have escalated sharply over the last few weeks thanks to the ongoing U.S.-China trade tensions and worsening business sentiment.

Analysts at Bank of America Merrill Lynch in a client note wrote “the risks of a recession have increased, and we are now very much on ‘recession watch.’” The bank also pointed to its latest monthly Fund Manager Survey that showed one in three respondents expect a global recession in the next 12 months, which is the highest reading since 2011.

Similarly, economists at J.P. Morgan estimate the chances of a recession at 30% in the next 12 months using the bank’s recession model. “Business sentiment has slid close to recession levels,” the firm wrote in a note. “Business sentiment is at a seven-year low and trade tensions continue to intensify.”

In a note to clients the team at Goldman Sachs points out that investors remain too pessimistic about the economy, writing “investor concerns of recession stir market volatility despite better-than-expected 2Q earnings results.”

Maybe not a recession, but definitely a slowdown

In addition to trade war fears and concerns around global growth slowdown, the recent yield curve inversion also spooked investors and sent stocks tumbling to their worst day of the year.

But J.P. Morgan Asset Management’s Jack Manley points out that the yield curve inversion in and of itself is not something to get worried about, saying that “the bond market is fundamentally different, and the yield curve is not an infallible indicator.”

Instead, he says there are plenty of other things for investors to keep on their radar, including the fading effects of the fiscal stimulus, the lingering trade uncertainty, a full employment economy, and a dwindling business sentiment, among others.

“I don’t think that these [above mentioned] things necessarily mean that we are posed for a recession,” Manley told the Final Round. “I think they confirm what we’ve already started to see, which is a slowdown in growth.”

U.S. economy slows to 2.1% annual GDP growth in second quarter.

So what does this all mean for investment strategy?

While Manley says outlook for international assets remains challenged in the near term, “risk continues to make sense for U.S. investors.”

“I think the markets have sold off quite a bit in the last couple of weeks,” Manley said. “And if you're willing to take on a little bit of additional risk, perhaps a little bit more volatility, go for it.”

Manley recommends tilting towards domestic high-quality large cap stocks. And should bond yields continue to fall, Manley says “duration is your friend for the ballast it provides.”


Iryna Kirby is a Producer for Yahoo Finance. Follow her on Twitter at @IrynaNesko.

Read more:

Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, and reddit.