Today I would like to share an e mail I received from Flexible Plan Investments regarding the fact that the yield curve inversion which worried investors that a recession was coming came to an end.
Tony Dwyer is one of the best quantitative analysts I know. Monday morning he sent out the following I thought you might find interesting.
|Last week saw both the equity and fixed income markets stay in a narrow trading range, which was a very welcome sign of stability given the potential dislocating news backdrop of corporate-profit reports, Brexit negotiations, trade-war commentary, chaos in Syria, and the continued political upheaval in Washington heading into the week. In addition, the Russell 2000 and Dow Transportation Index outperformed, the S&P 500 (SPX) made a new high (barely) and the cyclicals beat the defensive sectors for a change. That said, one area of concern was the move back to a positive sloped yield curve following the initial inversion of the 2-10-Year U.S. Treasury Curve. The concern is that once the yield curve inverts and then moves back to a positive slope, it is the final warning a recession and subsequent bear market are imminent.|
Don’t let the facts get in the way of a good story. Although it is true the last three recessions began with a positive sloping UST Yield Curve, it is misleading at best to suggest the initial move back to a positive slope offers evidence the end is near. We would make the following observations on all three pre-recession periods (using weekly data):
* 2008-09 recession and bear market. The 2-10 UST yield curve initially inverted the week of 12/30/2005, only to come out of the inversion the next week. The S&P 500 (SPX) rallied an additional 21.5% over the next 21 months.
* 2001 recession and bear market. The 2-10 UST yield curve initially inverted the week of 4/24/1998 only to come out of the inversion the next week. The SPX rallied an additional 36.2% over the next 22 months . It must be noted there was a nasty drawdown that was quickly reversed following the initial move back to a positive sloping curve.
* 1990 recession. The UST yield curve saw its original inversion the week of on 12/14/1988 followed by the initial move back to positive territory on 6/30/1989. The S&P 500 (SPX) rallied an additional 15.5% to the “the” peak of the cycle and subsequent recession.
Summary – Although the market is very nervous about the messaging of the UST yield curve and the prospects for economic growth, there can be a lot of time and upside before “the” peak of the cycle and recession. We believe the stage for the next leg higher toward our 2020 SPX target of 3,350 is set, driven by: (1) continued accommodative global monetary policy; (2) “less poor” global economic data ultimately leading to reacceleration; and (3) news and tweet fatigue.