In 2022, the yield curve, which maps yields on U.S. Treasury bonds of different maturities, became inverted, meaning short-term Treasuries had higher yields than longer-dated ones. This inversion carried on for 783 consecutive days, the longest in history.
An inverted yield curve has foreshadowed many recessions throughout history, so when a recession didn't materialize after this unprecedented inversion, many investors and market strategists were surprised. But that doesn't mean the U.S. economy is out of the woods just yet. Recent economic data has started to show cracks in the economy, and uncertainty around policy under President Trump's administration has made things even murkier.
It's understandable to see investors concerned about a recession. But in uncertain times, investors should always heed the advice of Warren Buffett, one of the greatest investors ever, and "keep your head."
Is there about to be a recession?
Despite soaring consumer prices, the economy has seemed unbreakable, with historically low unemployment and high consumer demand. Even the Federal Reserve's intense interest rate hiking campaign has struggled to put a lid on the economy and rein in inflation.
However, recent data has begun to show some weakness. The Federal Reserve Bank of Atlanta's gross domestic product model sharply revised first-quarter GDP estimates lower to -1.8% ( as of March 18). Earlier in the quarter, estimates had called for 2.3% growth. The unemployment rate also ticked up to 4.1% in February as the economy added fewer jobs than expected.
Perhaps most notable is consumer sentiment, which has seemingly fallen off a cliff this year. The University of Michigan's Survey of Consumers in March had a reading of 57.9, far lower than expected and the lowest level seen since November of 2022. Consumers expect to see a higher rate of inflation over a one-year and five-year time horizon.
Some of these concerns stem from President Donald Trump's potential tariff policies, which many economists believe would lead to higher inflation over time, although inflation did ease in February. Fed Chair Jerome Powell suggested during a press conference that if inflation increases but economic growth decreases, the two may end up canceling one another out.
Other investors are more worried about stagflation, a scenario in which economic growth moderates but consumer prices remain elevated or rise and unemployment rises. Some suggest the economy is still on solid footing.
"Keep your head"
Buffett got the phrase "keep your head" from a poem written by Rudyard Kipling called "If," specifically referencing one part:
If you can keep your head when all about you are losing theirs... If you can wait and not be tired by waiting... If you can think -- and not make thoughts your aim... If you can trust yourself when all men doubt you... Yours is the Earth and everything that's in it.
Buffett specifically tells investors to stay calm when the stock market turns volatile and unpredictable. There's no better time to heed this advice than after the broader benchmark S&P 500 recently flirted with correction territory at a blazing-fast speed.
The Oracle of Omaha (as he is sometimes called) has always maintained that while investors can never predict what will happen to the market in the short term, history has shown that patience has paid off handsomely for those investors who can stomach the tough times and keep their wits. This may simply mean holding onto stocks in your portfolio with strong balance sheets and a thesis that is still intact or taking advantage of a sell-off to buy stocks at more attractive valuations.
Now, this doesn't mean holding stocks blindly or pouring money that you can't afford to invest into the market. Stick to your investing fundamentals. Don't buy stocks at nosebleed valuations, and don't ignore new information that might put your thesis at risk. In many past instances, a recession has meant that most stocks will have a bad quarter or two. Investors who can block out the noise and stay patient, like Buffett, have been compensated quite well for their time and patience.
