Lots of talk about how to react to today's 3 month/10 year yield inversion and that a recession will be imminent in the next 12 - 24 months.
While that is quite possible, I implore investors to take yield curve inversions with a large dose of patience. You don't need to move your money on Monday, or even next week, or even next month.
While this a bit of pattern seeking that may not hold up again, I do ascribe to pattern seeking more than "this time it's different". Those are always famous last words at the end of bull markets.
Anyways, see the following 3 month/10 year curve and corresponding S&P 500 futures movement.
https://fred.stlouisfed.org/series/T10Y3M
https://finviz.com/futures_charts.ashx?t=ES&p=m1
You will notice a few things. First off, is the possibility that a short term inversion can happen and not spell any doom. There were very brief inversions that took place in September 1998, April 2000, and January 2006. In the case of 98 and 2006 there was considerable appreciation in stock afterwards. In 2000, April would have indeed timed the high well but there was a considerable distribution phase if you waited for more considerable yield inversion.
You will notice that a better signal is to wait and see a bit with the yield curve. Typically the recessionary signal will see an extended inversion that is deep and lasts for several months, then as the curve steepens again recession hits. Waiting as much as one month for full inversion will give you higher confidence in the signal. This gets you out in August 2000, and August 2006.
Corresponding with a move to bonds, waiting for a full month does seem to lose some appreciation in capital values, but you will still make out well with a bit of delay in transitioning to a risk-off strategy.
https://finviz.com/futures_charts.ashx?t=ES&p=m1
So looking at the present day, we have the following factors:
Large transition into bonds as investors go risk-off for a Brexit that may not actually happen
Possible US-China trade deal as soon as April
Fed that has made a commitment to a more dovish transition the remainder of the year.
While all these factors may end up being too little too late to prevent an extended inversion and recession, I believe it is certainly prudent to give such scenario's a bit of time to play out. Any quick movement on a trade deal or Brexit news could quickly make this inversion look more like 1998 than 2000. I do think the Fed is a bit too little too late on the dovish turn, but we shall see. The tech bubble was ultimately kickstarted in 1998 when Greenspan lowered the FFR in response to flat yields. Today's Fed is not taking an accomodative stance to that degree.
The reasoning for recession with yield curves is a rather simple one, there's no term premium for bank lenders and this dries up lending markets. Think of it this way, if lending dries up for a few days it's not a huge deal. If lending dries up for a few months, that is what causes a lagging recessionary effect.
In any case, this is just to reinforce that you should not panic and give yourself time to rationally make adjustments to your portfolio, if any at all.
It's also important to note that I believe such a strategy did not work out well in 1990 to my knowledge. So depending on your timelines and risk dependence, certainly there is no guarantee that stocks see an extended decline you would benefit from avoiding. I believe the 1990 bear market was rather quick and shallow, just slightly worse than what happened from October - December 2018.
Submitted March 22, 2019 at 03:52PM by BukkakeKing69 https://ift.tt/2TR9EK5
