Update 8/22/2019: The 10Y-2Y spread inverted very briefly during the day on 8/14, but finished the day at +0.01%. Am I worried now? Certainly more worried than in April when I wrote this piece. The ISM-PMI index is around 51 – that’s also weaker but not weak enough to worry; everything above 50 is still called expansionary, only below 45 it’s a serious warning sign. Unemployment claims are still very low, which is a good sign. So, this is still “only” a mixed bag. Consistent with a false alarm a la 1998. But the probability of worse things to come has certainly gone up!
Well, there you have it: The Yield Curve inverted last month. Finally! Starting on March 22 and throughout much of last week, short-term interest rates (e.g., the 3 months bills) yielded slightly more than the bond market bellwether, the 10-year Treasury bond.
People in finance and economics view this with some concern because history has told us that an inverted yield curve is a pretty reliable recession indicator. And I made this point in my post in February 2018: The yield curve shape, especially the slope between longer-term yields (10 years) and the short end (e.g., 2-year yields) is one of my three favorite macro indicators:
Also notice that I usually look at the 10-year vs. 2-year yield rather than 3-month spread and that made a bit of a difference recently, more on a little bit that later. But in any case, since I went on the record about the importance of the yield curve and now got several reader requests to comment on this issue, here’s an update: in a nutshell, I’m not yet worried and here are eight reasons why…
1: The 10-2 yield spread never inverted
Keep in mind that in the post last year I had used the spread between the 10-year and 2-year Treasury yields. That spread never went below zero (at least up until 4/2/2019 when finalizing this post). Am I just cherry-picking here? Imagine back in 2018 I had proposed using the 10y-3m spread (the one that recently inverted) and now I said: “oh, don’t pay attention to what I said last year, because the 10-2 spread is still positive!” Well, that would look like shifting the goalpost. But I’m consistent here: the 10-2 is what I proposed back then and that’s what I still look at. In the past, the 10-2 had been a more timely and consistent indicator than the 10y-3m spread and, therefore, I’ve always preferred the 10-2 version of the yield spread. There are a few more reasons that would all justify their own separate blog post – remember I used to do economics and finance for a living – but I don’t want to bore you with too much econ-babble. 🙂 All I want to stress here is that despite the big hubbub in the media last month, I’m not that worried until the 10/2 spread inverts!
2: The Yield Curve “un-inverted” again this week
Well, the whole episode didn’t last too long. The 10-year yield dipped below the 3-month yield for a few days between March 22 to March 28 but jumped up again after that. What do I make of that? Again, together with the fact that the 10/2 spread didn’t even invert, I’d not consider the event last week a full-blown significant macro signal.
Of course, critics would argue that in most previous events, the yield curve “un-inverted” again before the start of the recession, see the time-series chart above in the intro. To which I’d respond that not just was the duration of the yield curve inversion quite short but also the intensity was much lower than in the previous events, which brings us to the next point:
3: The 10y-3m and 10y-1y yield spreads only barely dipped below zero
Not only did the two spreads revert again but they never even fell far below the zero line. That’s in stark contrast to prior events, see the table below. In every prior yield curve event that preceded a recession, the short-end yield not just touched and slightly passed the 10-year yield but the magnitude of the yield curve inversion was much more significant than in 2019!
Well, the one occasion where we saw only a very shallow inversion was in 1998. But do you notice something? That was the one yield curve inversion that wasn’t immediately followed by a recession. Which brings us to the next point…
4: There’s been one “false alarm” that looks strikingly similar to the March 2019 Yield Curve inversion!
Every recession in recent history was preceded by a yield curve inversion. But in and of itself, that’s not all that impressive. Every recession in the past has been preceded by a Wednesday. That doesn’t mean that every Wednesday we’ll have a recession. A good macro indicator should (almost) never miss an actual event (type 2 error) but it shouldn’t have too many false alarms (false positive, type 1 errors) either; think of Paul Samuelson’s famous quote “The Stock Market Has Predicted Nine Of The Past Five Recessions.”
The yield curve signal did produce one false alarm in 1998. In other words, the curve inverted back then but that was way too early! There wasn’t a recession for about 3 years after the 1998 event. Rather, the yield curve normalized again before it eventually inverted in early 2000 (and with a vengeance, see the chart below!), about a year before the March 2001 business cycle peak.
Actually, the 1998 event is a bit reminiscent of the one in March this year: A very short and shallow yield curve inversion. And in 2019, the 10y-2y slope didn’t even invert! We can’t know for sure how the future will turn out. Maybe we will face the first big recession with only a very mild curve inversion. But I wouldn’t assign a very high probability to that!
5: Even if this yield curve inversion signals an upcoming recession it could still be years(!!!) away
There isn’t too much comfort in this one but I should still point out the obvious. In the past, the yield curve inversion would sometimes occur way before the start of a recession, see the table below. About nine to ten months at the minimum and most often more than a year in advance (not even mentioning the 1,040 days or almost three years of the 1998 false alarm).
Well, maybe the performance of the economy is not on your mind all the time. But I’m sure the stock market is, right?! Which brings me to the next issue…
6: In past instances of yield curve inversions, equities didn’t even perform that badly in the near-term
This is obviously related to the point above, but it’s important enough stress it again. Not only is the recession potentially a long time away, but so might the equity market peak! In other words, even if you take the yield curve inversion seriously, it’s not exactly an equity-sell signal. There have been instances in the past where the inversion occurred when the bull market was still very much intact, with months and even years, to run. Below is a table with a chart with the S&P500 index performance (nominal dollars, dividends reinvested) after the 10y-3m spread went negative. There was only one precedent where you lost money over the next year! Not exactly an urgent sell signal!
Thus, even if we take this yield curve inversion really seriously (and I still have some serious doubts!), right now I’d be on alert rather than panicked. This is not the time to run for the hills and sell stocks!
7: The Federal Reserve isn’t as aggressive as in the previous tightening cycles
A lot of the previous recessions coincided with the Federal Reserve raising short-term interest rates aggressively. It always goes like this: The Fed tries to fight inflation (perceived or actual) by raising interest rates to cool down the economy. The short end of the yield curve goes up but in expectation of the inevitable economic slowdown, longer-term interest rates already price in the prospect of a future recession and lower rates. The Fed will eventually go overboard with rate hikes and sink the economy. And right before that the yield curve inverted.
The current tightening cycle seems very different, though. Rate hikes started from a very low level, the rate hikes were very gradual and the final resting point (a 2.25%-2.50% range as of today) is much lower than in prior events. In fact, today’s (tentative) endpoint of the rate hikes is lower the lowest rate during the entire 1990s, which stood at 3.00%!
8: Other macro indicators still look quite solid
In the original post last year I mentioned that the yield curve signal is only one single indicator. Nobody in their right mind would propose forecasting an economic slowdown with just one single indicator. In my professional life before FIRE, I used to monitor hundreds, even close to a thousand global economic and financial indicators. No worries, I found a way to automate this and let the computer do all the work for me to sort out the noise vs. signal, thanks to some innovative methods I developed. But you know what, the Pareto Principle works too: 80% of the outcome is due to 20% of the effort. In this case, it may even be that 0.3% of the effort, i.e., checking 3 indicators out a thousand gives you almost everything you need to know.
In any case, the other two macro indicators I like to follow all look really good until now. Let’s take a look…
8.1: ISM-PMI Index
The ISM-PMI indicator stood at 55.3 as of 3/31/2019 (data released on 4/1/2019). That’s still a very solid reading: 50+ means expansion and even a tempdrop below 50 is common during economic expansions. I’d be on alert (not yet panicked) if the PMI drops below 50 and I’d be pretty panicked only if the PMI drops below 45. We’re still far away from that!
8.2: Unemployment Claims
Nothing new here either. There was a small bounce in late 2018/early 2019, likely related to the government shutdown but we’d need to see a much larger move. Remember, unemployment claims are still very close to multi-decade lows! This doesn’t look like a bona fide macroeconomic slowdown! Quite the opposite, the labor market is still rocking!
So, strictly speaking, out of my 3 indicators, none of them indicate a slowdown yet if I use the 10/2 yield spread rather than the 10y-3m spread! Nothing to see here folks, let’s move on, there doesn’t seem to be a recession around the corner!
Great post, Big ERN. Great to read some calming points about the economy/markets when other sources are warning of a recession at our door step. Your analysis is more in line with what I see. Employers all over are scarmbling for new hires and markets are bouncing back from the 2018 correction in a big way. Bull markets don’t run forever but this one still has legs, in my humble opinion.
Exactly my thinking! Thanks for weighing in, Ron! 🙂
As always, fantastic post, Big ERN. I have been eagerly waiting your analysis on this. Thanks so much!
Glad you enjoyed this post! Thanks for the compliment! 🙂
Really scientific and helpful
Thanks, Peter! 🙂
Good post. I still don’t try to time the market myself but it’s still nice to read some decent info instead of panic, click inducing news links.
Very good point! Sometimes it’s best to monitor what’s going on in the macro world to justify not reacting and staying passive. That’s what I try to do here: look for justifications to sell equities and realize that this high burden is not met right now! Despite the BS I read in the news about this YC inversion. 🙂
1) I read today’s low unemployment numbers as a recession predictor. In US economic history, how long has the country been able to sustain sub-4% unemployment rates? At some point, a lack of workers (and undeserved desperation promotions) puts an end to growth.
2) Note: The 1998 episode coincided with the Asian financial crisis, which threatened to become what the 2007-2008 financial crisis eventually became. It was a bumpy ride, but stocks ended the year way up.
https://www.pbs.org/wgbh/pages/frontline/shows/crash/etc/cron.html
In today’s case the inversion was not triggered by any particular crisis. The closest trigger event might be tariff negotiations with China, but they were are reportedly going well. The lack of imminent crisis as a cause of the inversion is problematic if we are to declare this another 1998.
3) I’ve heard stocks usually fall 6 months prior to a recession. If the inversion signal
4) Would it be possible for a very large fund to manipulate the treasuries market in order to create this unusual yield inversion and prifit from a decline in stocks? (i.e. unusual in that wouldn’t inversion of the 10/2 be more likely than what we’ve seen?) Might the trading volumes allow for such a fraud?
All good points.
1: I don’t think that the expansion needs to end just we get to <4% unemployment. So far inflation has stayed subdued and even if there's a little bit of inflation above the 2% target there are several FOMC members that seem to be OK with it.
2: So, that's additional justification not to worry. I think the current YC inversion was even more of a fluke than in 1998.
3: In 2007 it was 2-3 months before. Equity peak in early-mid October and recession start in December. Since the YC inversion often happens 12+ months ahead of the recession there is normally still some time for equities to run.
4: No. It's a big market. If you add futures plus physicals you're in 100s of billions of dollars in trading volume EVERY DAY. But I think that a foreign government with enough Treasury holdings could theoretically "manipulate" the market.
Excellent discussion and analysis. Even if the yield curve inverts, it in itself is not an actionable signal.
Exactly! Glad you like the post, Doc! 🙂
Big ERN – Thank you for your insights. I think your analysis is solid, however, the following is quite troubling to me and I’d love to get your opinion:
https://www.tradingview.com/chart/ICSA/xGwLywAJ-Don-t-Miss-This-POWERFUL-Recession-Analysis-ICSA-ES/
Is the end as near as this analysis implies?
Well, to some degree the post is spot on. Recall that this is the exact same series that I use as my top labor market indicator and one of the three top macro indicators! But there are some flaws to their exact rule:
There were a lot more false signals to their exact crossover rule, e.g. too early in 2007 even though they never marked that spot in their chart, 1995, etc.
This signal will also give a false positive if the claims were to stay low and bounce around for the next 5 years even if there’s no recession.
The message here is that there can never be a purely strict and mechanical rule. It takes a little bit of science and art (!!!) to see when the claims are taking off and it’s time for the next recesssion.
But thanks for the link!!! 🙂
Great analysis Karsten. Corrections are actually frequent (about once per year since 1900) and in 80% of cases, they do not turn into a bear market (20% drop). Bear markets have actually happened every three years or so since 1900. So yes, bear markets and recessions happen. It’s part of life. Will the next one be in 2020? 2021? Don’t fear the future. Have a reasonable SWR (I like a CAPE-based formula) and be flexible if needed to minimize SoRR.
Yeah, a bear market will happen again. But it’s still exciting to monitor the macroeconomy because the bear markets that are damaging from a SoRR point of view are those that coincide with recessions, especially the really bad ones (1930s, 1970s, 2007/8).
But you’re totally right about the frequency of sharp drawdowns! 🙂
Hi Big ERN, do you have an opinion on the all-weather portfolio described by Ray Dalio? If you use his diversification strategy we may not need to worry about predicting when there will be a recession or sequence of returns risk.
Depends.
If I assign my personal expected real returns:
Equities: 5%
LT Bonds: 0.8%
Interm Bonds 0.4%
Gold: 0.5%
Commodities: 0%
Then that’s a weighted real expected return of 2%. Depending on your age and stage in life this might be appropriate or not at all appropriate:
1) you’re young and still accumulating assets. This portfolio sucks. You should take much more risk (and get higher expected returns) and not worry about flucuations. See my post from January: “How can a drop in the stock market possibly be good for investors?” https://earlyretirementnow.com/2019/01/23/crash-good-for-investors/
2) You are early retired: You are planning a 4% real withdrawal rate and you generate only 2% on average. That will not last very long (expect your money to run out after 35-40 years). Or keep this short-term and then do a glide-path to a higher risk and return portfolio.
3) you are retired and 65 years old. This might actually work very well! Because over a 25-30y retirement horizon you only need to generate 1-1.3% average real return and use cptial depletion for the rest to make the 4% rule work.
What if you juice this up with some leverage? Is that what all-weather does? I guess I should read (and think) more first, comment later…
Good suggestion! That would do the trick! The nice thing is that the all-weather portfolio is close to the tangency portfolio, which has the highest risk-adjusted expected return. But in absolute numbers the exp. return would be too low. If you scale this up by maybe 2x, now we’re getting somewhere.
It’s not trivial to do for the average Joe investor, though. You’d need to trade futures to do that. Or use leveraged ETFs but they have high expense ratios.
ERN, I noticed your “personal expected real returns” don’t quite match what’s in the SWR Toolbox 2.0 spreadsheet. Have you laid out your thinking behind these figures anywhere? I’m especially curious of the thought process that leads to gold having a 0.5% (or 1%, in the Toolbox) real return 🙂
As always, thanks for the article! Brings some perspective to all those mainstream media articles playing up the 3M-10Y inversion when, as you pointed out, they’re not even looking at the most historically accurate ratio…
Yeah, I don’t update those “expected return” in the SWR sheet regularly.
Gold had a 1% real return over the very long-term (100+ years) but I would shrink that toward zero (half-way) to account for theuncertainty and potential ETF expense ratios (0.4% for GLD).
Of course, bond expected returns also bounce around a lot. So, if you use the sheet, please use your own numbers you think make sense! 🙂
Great analysis Krasten and spot on! Also as an immigrant to USA I look at all these indicators in a global basis. Developed economies like Japan and Australia provide great use cases for us to compare and contrast.
Thanks! Yeah, and especially having the comfort that we’d likely not have a Japanese lost-three-decades here in the U.S. 🙂
Big Ern, thank goodness you are back in action, and not a moment too soon! I have been waiting to see what you would say about the inversion. Like you, I have been watching several other indicators and am not too concerned about the economy. However, I have been a bit concerned that there seems to be so much more general awareness of and public chatter about yield curve inversions now than there used to be. It’s making me wonder if there could ultimately be a “self-fulfilling prophecy” effect of people cutting spending and pulling out of the market because they expect a market drop/recession, thus actually leading to the market drop/recession that people expect! If the yield curve were to invert again and stay inverted for longer, would you be worried about that potential self-fulfilling prophecy, or would you just keep your eye on the other indicators and not concern yourself with increasing public paranoia about the yield curve?
Good point! I think after the WSJ wrote today “The World Seems to Have Dodged Recession, for Now” (https://www.wsj.com/articles/the-world-seems-to-have-dodged-recession-for-now-11554489489?mod=searchresults&page=1&pos=1) we probably didn’t do too much damage in people’s perceptions with this very short YC inversion.
But I could see that “animal spirits” or “self-fulfilling prophecy” issue where everybody (consumers, investors and businesses) hunker down because we all expect a recession and then it actually comes.
So, yes, if the YC really inverts and stays inverted and there’s some other macroeconomic supporting evidence then I’d be worried. Which is, incidentally, exactly the plan I outlined in the Feb 2018 post.
Great work!
What strikes me is that there will always be Cassandras who warn that the end if nigh.
I’m prone to believing that the next collapse is just around the corner and that I alone the insight and expertise to detect – BUT I DON’T.
Over the years I’ve had to drop interest in certain things due to not having enough time – sports, the arts (mostly), politics back home. maybe it’s time to put the economy on that list (alongside Brexit). talking about things isn’t going to change them and I’m probably not a great investor anyway – so doing the exact opposite of what my gut tells me is maybe the right move.
If in doubt, stay invested! 🙂
Thanks for stopping by!
Thanks!
This sentence looks to be missing a word:
“But I wouldn’t assign a very probability to that!”
Got it! Corrected the error! Thanks!
The use of a more comprehensive and quantitative measure of economic trend, versus singular data series such as the yield curve, may be had through the use of the Conference Board Leading Economic index.
In the book “A Guide to Modern Quantitative Tactical Asset Allocation” *, A “trend change” in the CB LEI 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. The CB LEI is constructed with a composite of 10 data series components ( of which the yield spread being one ), creating a more robust view of economic activity. One may see many of these components being used in analysis and market commentary, in isolated fashion, in attempts to devine the direction of the economy / equity markets.
A simple combination of the trend change in the CB LEI variable confirmed by signaling produced from a stock market trend identifier ( S&P500 price / 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.
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, temporarily switch to duration assets ( months in most cases ).
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
So the clock “may be” ticking towards a defensive signal, but second guessing is futile
. . . .
* https://tinyurl.com/y6w4ca8b
** https://tinyurl.com/y9rrzral
Thanks for that link. Very interesting.
I doubt the “clock is ticking” now for the exact reason that it wasn’t ticking in 1998, so I’m staying calm and carrying on here for now.
To me a flat yield curve is not really an indicator is recession here but a simple function of a Fed tightening cycle. The front-end has had to move up over 200bp due to Fed tightening; the 5y5y rate, however, hardly moves given limited changes in both long-term real growth or inflation expectations. Hence by simple mathematical construction you get a fairly chronic flattening in the spot 3m10y curve. Globally we see most developed market yield curves much flatter that history would suggest due to a variety of reasons. The view that we are in a “secular stagnation” environment, demographic changes creating greater demand for safe assets, regulatory changes etc.
If you look the yield curve in forward space, the inversion is in the front-end between 3m LIBOR and mid 2021. There is about 40bp or so of cuts priced. After that the curve is flat to modestly postively sloped. The market is seeing the balance of risks towards cuts over the next few years. What the forward curve is not pricing is a fundamental Fed policy error (so we are not seeing 1y1y vs. 5y5y inverting). Yes, 2y10y is close to flat but 2y10y, 1y forward is +30-40bp.
All good points. One word of caution about this statement:
“To me a flat yield curve is not really an indicator is recession here but a simple function of a Fed tightening cycle.”
There is no either/or. Many past recessions have been caused by Fed tightening cycles. But I agree with your final conclusion that we’re don’t really have to worry yet! 🙂
Greetings from the UK again. So once again great analysis as ever! But let me ask you a question following up on some of my previous posts about the psychology of early retirement.
Your title says “Why I am not worried yet”…..But why should you be worried anyway? In fact why should you be worried if there is (a) a great depression (b) a long slow decline in equities as was experienced in the 1970’s (c) a very significant financial crisis as was experienced in 2008 or (d) anything else that has been experienced in the years that your safe withdrawal analysis covers.
I say this because significant recessions, depressions, conflicts and the like will almost certainly occur. And given your SWR is low enough that your portfolio with withstand such events, based on historical returns you should have nothing to worry about.
What I think one, who is utilising a SWR, should be worried about is known unknowns and unknown unknowns to borrow a phrase from one of your recent politicians. i.e. portfolio returns are materially less than the US has historically achieved (a known unknown), BREXIT (in the UK was a unknown unknown in the first part of this decade to which the outcome now is not known or frankly predictable).
This is not a dig at all, it’s more of me trying to understand how I will deal with approaching FIRE. I have a largish portfolio and large expenses and query if I would sit there year after year.
I suspect most people reading and writing on these blogs will waver if there is a serious stock market crash or worse a repeat of the 1970’s.
Increasingly I am thinking the best answer for me is to carry on some part time work and achieve a better work life balance!
That’s a very valid point. If you pick a SWR low enough you SHOULD prevail. But there are still some nagging doubts, right? In the past, your portfolio would have dropped precipitously (maybe 40 or even 50%) and it always recovered. But you won’t know the next time around. It’s a bit like driving in an armored car: You will still be worried about IEDs.
Make lemonade out of lemons.
Take the opportunity with a yield curve inversion to re-finance any existing mortgage debt you have. Mortgage rates are based off of the 10-year bond yield. The lower the 10-year, the lower the mortgage rate. When the 10-year fell in late March, it was a great time to lock in cheap mortgage financing.
Very good suggestion! Not quite the record-low mortgage rates from 2012/13 but still pretty good!
Hi Big Ern, yet another great article! I have a (hopefully) quick question for you: If you knew someone in their late 30’s that just received a windfall (say $2 million) and wanted to retire early sometime in the next year what would you advise them to invest in and when? Would you advise them to wait until the CAPE was lower? Are there any indicators that you might wait for before investing? Thanks for all of your great insights.
Waiting until the CAPE drops can take a long time. I’d target an overall 60/40 portfolio and a glidepath back to 80/20 or even 100/0 over the first 5-10 years and you’re good to retire.
As always, thank you for the education. I like how you filtered it down to 3 indicators, really helps us mortals out when determining asset allocations.
Thanks! Yeah, it’s a Pareto Principle: get most of the info for a fraction of the effort! 🙂
Hi ERN so knowing recession might be in some time betweeb 537 to 1040 days, are you making any changes to your investment ?
No recent changes. I certainly feel that the option-writing stratgy would perform better than plain equities. Same with real estate. But we still have the bulk of our investments in stocks.
I’m impressed how people who used to work with dates still use this awkward m/d/Y format instead of a more logical YYYY-mm-dd standard 🙂
Ha! Very good point! But now after I finally got used to the American date format, mm-dd-yyyy, I will probably not go back! 🙂
ERN, what do you use to get historical data for ISM-PMI and unemployment claims? Thanks for your contributions to the FIRE community!
Long history:
https://www.quandl.com/data/FRED/NAPM-ISM-Manufacturing-PMI-Composite-Index
But that stops for some reason.
Recent data:
https://ycharts.com/indicators/purchasing_managers_index
ERN,
Are you worried now that the 10-2 curve inverted? Would love to hear your comments on this.
Not yet. I included a short comment at the beginning of this post. I will see how things evolve, maybe I will write another post on this.
Why don’t I see this inversion on the Treasury’s “Daily Treasury Yield Curve” (https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2019) page or on FRED (https://fred.stlouisfed.org/series/T10Y2Y/)? Did it invert in the middle of the day and then un-invert for the end of day reporting? Or am I looking at the wrong data?
You got the right data! It was “only” intra-day. It finished at +0.01% on 8/14. I updated that paragraph at the beginning of the post! Thanks!
I can’t understand why so many people talks about recessions as their effects could be tangible on a portfolio only after losing over 20-30%…if I look at the index price I CAN CLEARLY SEE how dotcom bubble started in mid 00 and housing bubble in mid 07…so I can’t understand why people is talking about 01 and 08 recession when by that time I would have lost a lot of money already. I consider an investment “good” only when im putting money on the market and be “sure” they will grow for many years, so I DO NOT consider the 98 yield curve inversion such a false alarm, cause I DONT WANNA BE there when the recession comes, i WANNA BE THERE when everything is crumbled MORE THAN 30%, better if 60%. However, when we talk about investments, a false alarm is STILL AN ALARM before it can be considered a false one. This is why putting money now in stock markets is DANGEROUS, it’s more a bet than a real investment.
When I look at ism-pmi it just makes me laugh because that kind of macro indicator DOES NOT PREDICT a recession, it just suddenly spikes down 50 DURING a recession, so basically it CONFIRMS a recession, just like the unemplyement rate.
Regarding this one, I use to see it with a different logic, even if we like the idea of a 0% people unemployed, we always have to understand that world and society are never been, are not, and will never been perfect, that’s why we always failing that ideal, cause its quite normal that a relatively small percentage of people will be unemplyed even in a full expansion scenario. Also, we have to consider that not every job today is really a STABLE job, just think about how many people got low duration employs before just swapping to another one.
So I have to tell you, I DONT LIKE the fact that less than 4 people out of 100 are currently unemployed in a country like U.S., it tells to me that it’s too good to last.
Just my opinions btw…
You don’t have to like the approach. I can tell you though that after working in the industry, the recession timing approach is taken very seriously in tactical asset allocation. It’s not the ONLY thing you look at but it’s one signal in a spectrum of information. I made a very good living with it when I worked in finance.
Note: Nobody would ever argue that the macroeconomy leads the stock market. It’s the other way around, of course. But You can time the market by getting out way before the market trough. Again: You can’t avoid the entire 50+% stock market drop, but if you get out on time and miss the drop post September 2008, you’d already gained a lot.
These are the nuances you’ll miss when you just look at the issue from a “bumper sticker” perspective.
Tbh, nowadays I prefer to think stock market is primarily driven by liquidity, greediness and hedge funds, then by macroeconomics just after these. A recession just need an excuse, not a real economic issue, would not be too much surprising a “CoronaVirusRecession” to cover the “PublicDeptRecession” even if the real threat from this outbreak is pretty redicolous.
By the way your approach supposes you’ve been in position for a decade and ready to run away, which does not contradict the fact that opening long-medium term position NOW, is a pure bet.
Wow, that’s a pessimistic view. Good to see that I’m not most negative person out here. 🙂
Not exactly if understand how good is a 50%+ crash in stock market for smart investors.
A 50% drop is good for investors who were out of the market for the drop and then re-enter.
I think a 50% drop is good for everyone with available liquidity, better if part of this liquidity is sold after 20%+ drop. Don’t you agree?
Yeah, absolutely agree. But it’s always hard to time that in and out! 🙂
So, the inverted yeld curve predicted another recession. 36% flash drop, not a bad discount for my equity line that was flat since december.
Yeah, it did. For the wrong reason, though. It’s not like the aggressive action of the Fed derailed the economy. And it’s not like the bond market knew in 2019 that we’ll face a global pandemic.
Uh-oh another 2y10y inversion today. It will be interesting to see how this one plays out given inflation and labor market is much hotter than last time.
Intraday, right? The closing yields were 6bps higher for the 10y. But nevertheless, it might only be a question of time until the curve inverts. Not a good sign for the the economy.
Yeah, the 2 year yield jumped 110 bps in less than a month!
I wonder when the QT talk will start. The Fed still has a few trillion in bonds from the ’08 recession on its balance sheet that it never got rid of.
I noticed a the recent Vanguard market perspectives article suggested that the 10y 3m inversion was a better indicator of recessions than the 10y-2yr spread that you suggested. They didn’t provide any evidence, but it was a little surprising given that they usually don’t make many predictions like this unless they’re really confident on them.
https://advisors.vanguard.com/insights/article/marketperspectivesseptember2022
It’s wishful thinking: since the 10y-3m hasn’t inverted yet, there’s still hope that we won’t have a recession. But it’s just a question of time. The 3M LIBOR is already above the 10y yield and the 3m Treasury will soon follow as well, likely by the end of the year.
There’s also a bit of a misunderstanding in the journalism and finance world about the yield curve indicator. It’s often interpreted as a strict 0 vs. 1, on vs. off, or true vs. false signal. It isn’t. Not just the sign but the magnitude matters. So, even if the 10y-3m indicator hasn’t gone below 0 (yet), the indicator is terribly low. Just like the 10y-2y series, it points to significant weakness.
PSA: 10y-3m yield curve has now inverted as well: https://fred.stlouisfed.org/series/T10Y3M
It shows that the 10y-3m is an inferior leading indicator in this current environment: If there’s no recession it had a false alarm, like all the other indicators. If there is a recession, then the 10y-3m inverted much later than the others.