Message from Jon
If you're watching Yield Curve data...these data points are equally important if not more relevant!
We have been hearing a lot of information lately on the yield curve and its indication of a recession. I thought it might be useful to touch once again on this topic to give insight into what the numbers say and what our thoughts on the conditions are.
Our position is that, while we agree that in the past, an inverted yield curve is associated with a recession, it is certainly not the only data that will be present when a recession is short to arrive or even on the doorstep.
In an article published on July 16th and updated on August 15th, Chief US economist, Lara Rhame speaks to the value of more relevant measurements of an impending recession-initial Jobless Claims and Consumer Confidence being top on her list. "Should claims rise to 275,000 over several months, I would become more pessimistic about our growth outlook." We the US have become a consumer-based economy rather than a past version of ourselves when we led the world in manufacturing. As such, Rhame indicates why she puts so high a value on the consumer confidence numbers. "The consumer is the single most important sector for the economy, making up 69% of GDP." 1 At present, we are at highs in confidence.
We have solid GDP numbers, highs in un-employment, and earnings that are beating expectations. Locally we are seeing help wanted signs everywhere and in almost every segment of our economy.
Let's play devil's advocate for a second anyway to see what the numbers say according to Marshall Shield, Chief Strategist at STIR Research, when a recession hits and the FED adjusts the rates-just for those cynics in the audience.
- STIR Research LLC, analyzed the past 65 years of what happened to the market after a first rate cut following a period of stable or rising rates. 16 cases were found.2
- Double digit gains follow the first rate cut when the secular trend is bullish. Gains of 6 and 11% are the norms regardless of Bullish or Bearish trends in the first 3-6 months.2
- Gains are 3 times larger in secular bull markets than in secular bears.2
- Would a recession change the outlook at all? NO.2
- In 9 cases out of the 16, a recession followed the following year and yet 28% and 36% were the gains during recessions while 16% and 36% in bullish years.2
What does the data say?
At the moment, we are to remain in equities. Not saying the Yield Curve is irrelevant, because it does signal that shorter-term bonds offer better yields than longer-term bonds, but as far as a reason to hide from the markets...it's not enough of a reason by itself.3 What we are doing is paying close attention to a number of data points that will likely lead us to re-examine our approach sometime between 2020-2022, if I am a betting man. We are in a high volatility environment that can make one feel enough anxiety to choke a horse, but that comes with the territory, I guess.
A secular bear market-one that has been present since spring of 2000, in my opinion-can indeed have cyclical bull and bear periods that will undoubtedly cause investors to grow weary and chase returns. The reality is that during bear periods, you have elevated amounts of volatility and motion but very little advancement. Frustrating but true.
Can this time be different than the past 65 years? ...sure. Will it, I have no idea, but I am willing to bet that what we base everything on today is likely to change by year's end, so staying in the moment is the best approach for now.
Till we speak again, enjoy your week!
Equities Face Some Volatility
WEEKLY UPDATE - AUGUST 19, 2019
The Week on Wall Street
U.S. stock indices saw significant ups and downs last week, with traders looking for economic cues from Treasury yields and also developments in the tariff fight between the U.S. and China.
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