Why the yield curve is an accurate and less useful indicator
Economic growth has been slowing, and bond yields have been falling. Now, the yield curve–the difference between long and short interest rates–has turned negative . . . an ominous sign that a U.S. recession may follow. Are we doomed?
History has shown that the yield curve does act as a warning sign for trouble ahead, but it is possible that a recession is still a year or two away. In the meantime, investments have typically done all right.
However, some investors have already thrown in the towel. They moved out of stocks. All this money must find a home, and that home in 2019 has been cash. I believe this to be a mistake.
The bright spot right now is the financial health of U.S. consumers. Representing 69 percent of the economy, consumers have less debt than they did prior to other recessions. Plus, the job market is still extremely healthy.
The greatest threat is falling manufacturing–a global problem that the trade war is making worse.
The Federal Reserve may not have the tools to fight this war. After all, rates are really low. So, will lowering them more make much difference? If the Federal Reserve can make a difference, then it is worth noting that money is cheap right now and likely to get cheaper.
Usually, the Fed raises rates even after the yield curve inverts. These rate hikes have preceded each of the last six recessions. That’s 100 percent of the time.
This year is different. Not only will the Fed avoid raising rates after the inversion, but it already lowered rates before the curve even inverted. The Fed has never acted faster. It is extremely flexible to the markets in 2019. And, as the famous investor Martin Zweig advised, “Don’t fight the Fed.”
*Research by SFS. Investing involves risk, including potential loss of principal. S&P 500 time period chosen to display sample of timing of government actions. The S&P 500 is an index often used to represent the U.S. stock market. One cannot invest directly in an index. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based upon changing conditions. This is not a recommendation to purchase any type of investment.