On Monday, the yield curve briefly inverted. By inverted, I mean that for a short amount of time on Monday you could make more money owning a 2-Year Treasury Bond than a 10-Year Treasury bond. And this is seen by many as a reliable indicator of a coming recession. This is why the market selloff happened. If you dig a little deeper you'll find the actual significance of this event is debatable—for several reasons.
The first is that historically the yield curve needs to stay inverted for more than a few hours—more like a few weeks or months—for the indicator to be reliable. The second is that even when the curve does stay inverted it could take anywhere from 10 to 36 months for a recession to occur. And last but not least, a recession does not necessarily mean that a bear market is coming. The two are correlated. But unlike a high school romance, the two aren’t codependent on each other.
The big question is what is the actual culprit of this inversion? It isn't GDP—that's still growing. Unemployment is still low. Retail Sales and Consumer Confidence continue to increase. So what gives? All signs point to a market worried about a prolonged trade war with China (which is slowing global growth) and a global economy looking for yield—and finding it in US Treasury Bonds—which in turn is causing the curve to invert.
Here are two of my favorite quotes from financial analysts commenting on what happened.
“The contradictions in the shape of the US yield curve versus the economic data and credit conditions have been reinforced by two other variables – risk aversion and the carry trade. The former has been caused by the grinding US-China trade dispute and the latter by the interest rate differential between the US and other developed markets. In turn, this has underpinned the US dollar and money markets with last week’s inflows running at the same rate as last December. Moreover, August historically produces the worst monthly returns.”
And my personal favorite...
“Damn the trade war torpedoes sowing the seeds of uncertainty, it is full speed ahead for the American consumer as they pull out all the stops to keep the economy humming as we start the second half of the year. This is not what a recession looks like. We know. We checked it. The rule of thumb for recession is three consecutive months of declining retail sales. Instead, retail sales are soaring with sales jumping 0.7% in July and non-auto retail sales up 1.0%.”
What's the takeaway? Go enjoy your weekend.
As always, thanks for reading!
*These are the general views of Stanton Burns and they should not be construed as investment or financial advice for any individual. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Stanton Burns does not maintain positions in any securities mentioned as of the writing of this article. Past performance is historical and does not guarantee future results.