The yield curve inverted last week (one-year Treasury note yield is higher than the 10-year Treasury note yield), which has all of the talking heads on television forecasting the doom and gloom of an imminent recession.
As we have discussed in these pages before, there are several factors to consider before selling your children in anticipation of a financial crisis.
Recessions are a normal part of the economic cycle, and yes, we will eventually face another one, but the talking heads are leveraging our human nature to get eyeballs on to their news shows and sell advertising space.
It is human nature to use “rules of thumb” to simplify what are often complex and multidimensional events.
While it is true every recession in the modern era has been preceded by an inversion, not every inversion has resulted in a recession.
With the inversion last week, it lasted all of one day…with the yield curve returning to “normal” the following morning. There is no mention of how deep the inversion was…which is a topic of substantial academic analysis, which I will spare you the boredom of relaying here.
Another fact to keep in mind…the inverted yield curve is typically six to 24 months before the (if at all) recession, and if it is anything like 2007, the market went up another 29% before the recession began, so as usual, market timers left opportunity on the table.
As we have discussed before, equities have a place in your portfolio for long term growth, and if you have limitations on your timeline or risk tolerance/risk capacity, there are tools that can mitigate the equity market volatility (with concurrent trade-offs) that we can discuss and analyze as part of your global asset allocation.
Kindest regards,
Dave
Drew