This week, stocks hit all-time highs and continued to climb. Yields are also rising and corporate bond spreads point to investors being more confident with the current economic conditions. The yield curve, whose inversion set off alarms about the risk of a recession, has gone back to normal which means that longer term treasury yields are above the shorter term treasury yields once again.
The yield curve – a stable predictor of recession, that inverted in Nov 2018 and stayed that way till last week is quickly being debunked. But, what if investors are confronted with evidence that they’re wrong? Some economists caution that once the yield curve has predicted a recession, one usually follows even if that signal changes later and that the recent optimism overlooks the fact that we continue to see the global economy decelerating as trade slows and manufacturing contracts.
What is an investor to do now? Jump all-in or continue to remain cautious?
Future Wealth’s View
There are some reasons for investors to be upbeat after months of anticipating the damage from the trade war – the job market remains strong, mixed earnings season but some corporate results have been better than expected, and the Federal Reserve seems to be on the pulse with interest rate cuts. But, the Fed can’t help the economy forever by continuing to cut rates and job market is a lagging indicator like the trade, manufacturing and corporate earnings. All this makes rest of 2019 and 2020 hard to forecast, especially if there isn’t a China trade deal.
Our position, at Future Wealth, is to buy value, not growth, and stay defensive with high dividend names. There are moments, and this might be one, in which staying safe is better. There will be other moments, when investors’ per capita quantity of stupidity will get so high and sensibility gets so low that a certain set of people will be saying “I told you so”. Such a moment might be arriving.