Time to yield?
If there is one thing the last few months in the stock market has taught us – it is time to look ahead to what else could be coming to derail the market even further. Here is what we know – juiced by President Donald Trump’s tax cuts, business investment helped deliver a robust U.S. economy in the first half of 2018, but the growth may be stalling. Companies are facing tariff uncertainty even as global demand is faltering and borrowing costs are rising as the Fed is poised to raise interest rates later this month. In the meantime, U.S. and China are in for protracted trade war, as the impact of tax cut stimulus fades away and is replaced by a politically divided Congress that will likely end up in gridlock.
In the meantime, the trend “inversion” in rates is raising its ugly head. When short-term rates rise above long-term rates and “invert” the yield curve, it has been a reliable predictor of recession. Earlier this week, the 2 year and 5 year treasury yields inverted and it is widely expected that if 2s and 10s invert between now and Dec. 18, the Fed is going to have to take out some of the hikes next year, signaling a slowdown in the economy going into 2019.
Bottom Line – The best gains in the market may already be over.
Future Wealth’s View
The yield curve is esoteric indicator that most investors don’t pay much attention to, but – they should. One does not need a Phd in Economics to understand the yield curve but some knowledge of economics will help. Of course, much of the media would rather interview Elon Musk or Zuckerberg than have a competent economist talk about yield curves. But, the indications from the performance of the yield curve has valuable lessons for investors who are invested in the market and hoping to protect themselves from the next big correction.
Here is what we know – The yield curve from three to five years dipped below zero during the last cycle for the first time in August 2005, some 28 months before the recession began. Many ignored that sign as a looming indication of one of the biggest corrections ever witnessed. Now, 13 years later, at the tail end of one of the strongest bull markets, we are once again seeing the same indicators flashing “red” signals. While there are no guarantees if recession will occur again in 10 or 28 or 36 months, ignore these signals at your own peril.
In their book titled “Leadership and Self-Deception. Getting out of the box”, a couple of smart authors from the Arbinger Institute posit that when we are self-deceived, we 1) inflate others’ faults, 2) inflate our own virtue. This may be true in some cases, but there can be no self deceiving when one’s retirement savings has been cut in half from their own folly of not paying attention to key economic indicators.
Jay Srivatsa
CEO, Future Wealth LLC
Phone: (408) 839-4430
The information contained in the report does not constitute an offer, or a solicitation of an offer, to buy or sell any securities or other financial instruments, including the securities of companies listed in the report. Investors should not rely solely on the information in the report in making an investment decision.