FYI: Unless you spend your day glued to a Bloomberg terminal or mainlining CNBC, you might have missed the news late last week that the yield curve for U.S. Treasury bonds “inverted” for the first time since 2007. This dry-sounding development has led to a great deal of speculation on Wall Street and in the financial press about whether an economic downturn might finally be on the way. As the Wall Street Journal’s James Mackintosh put it, “The market’s most reliable recession indicator is finally flashing red.”
Why does this have people so worried? The yield curve has inverted in the lead-up to all nine U.S. recessions since 1955. As the Federal Reserve Bank of San Francisco notes, there has only been one instance in the last six decades when an inversion wasn’t followed by an official recession within two years or less. That was back in the mid-1960s, when growth slowed, but the economy didn’t technically shrink. Since then, there hasn’t been a single false alarm.
Regards,
Ted
https://slate.com/business/2019/03/recession-indicator-yield-curve-economy-worry.html
Comments
I read Jeffrey Saut's commetary of Raymond James more so than Ms. Sonders of Charles Schwab; although, I think both of them offer up good investing wisdom.
Linked below is what Mr. Saut's thoughts are on the subject.
https://www.raymondjames.com/wealth-management/market-commentary-and-insights/investment-strategy
The average span between inversions and subsequent recessions has been 11 months, with a range of five months (1973) to 16 months (2006-2007).
Good to go for at least next 5 months !
Derf
Thanks O_S & O_J 4 links
The yield spread is an important and useful ( and is definitely getting a lot of attention these days ), yet it is an isolated data series
In the book "A Guide to Modern Quantitative Tactical Asset Allocation" *, one of the few data series that has shown enough precision and statistical confidence for use towards signaling infrequent tactical shifts from equity based assets into safe duration assets in avoidance of significant decline events and sequence of returns risk, has been a "trend change" in the Conference Board Leading Economic index. The CB LEI is constructed with a composite of 10 data series components ( the yield spread being one ), creating a more robust view of economic activity. One will see many of these components being used in analysis, in isolated fashion, in attempts to devine the direction of the economy / equity markets.
A trend change in the CB LEI variable combined with and confirmed by signaling produced from a stock market trend identifier ( Moving average variable - core concepts # 3 & 4, chapters 1, 3 & 4 * ), has identified the bulk of significant market decline periods over the past 50 years.
At present, the two trends are positive ( since July of 2009 ) **
Additionally, from the past historical signals generated ( Chapter 5, Part 1, table 2 * ) in the past, we can see the gains accrued from the onset of the inversion to the next negative trend change of the LEI / moving average variables https://imgur.com/EGpcnQC
A key premise to successful investing involves the holding of equity based assets for longest optimal periods ( years in most cases ), and in rare circumstances, switch to duration assets ( months in most cases ).
. . .
* https://tinyurl.com/y6w4ca8b
** https://tinyurl.com/y9rrzral
My question for you ... Still, as far as wonky market signals go, the inverted yield curve is a fairly ominous one with a good track record. Would you want to bet against it?
For me ... I did the proactive thing thinking this was coming via recent FOMC rate increase policy; and, reconfigured my portfolio.
Skeet
Thank you for your notations.
My all weather asset allocation of 20% cash, 40% income and 40% equity affords me everything necessary to meet my needs now being in the distribution phase of investing. The benefit of this asset allocaton is that it provides sufficent income, maximizes diversification, minimizes volatility, and provides long-term returns.
The 20% held in cash area provides me ample cash should I need a cash draw over and above what my portfolio generates plus it can provide the capital necessary to fund a special investment position (spiff) should I choose to open one during a stock market pullback. In addition, cash helps stablizes a portfolio during stock market volitility.
The 40% held in the income area provides me ample income generation to meet my income needs in retirement. It is a well diverisfied area that incorporates a good number of diverisified income generating type funds including a commodity strategy fund that has a yield of about 11%.
The 40% held in the equity area provides me some dividend income along with some growth that equities generally provide that offsets the effects of inflation plus, over time, they tend to offer up a growth of principal benefit as well.
I found years back this asset allocation model gave me good comfort when I ran my parents money during their retirement years. It is also the model my parents broker recommended that I follow which worked well for them and now I have adopted it.
My father's all weather model had less risk than the one I have described above. His model was 25% cash, 25% fixed income, 25% stocks and 25% real estate. Also know he was raised during the depression and farm land was a cherished asset.
https://www.morningstar.com/funds/XNAS/PCLAX/quote.html