Trade battles, volatile equity markets, ten-year US Treasury yield flirting with the yield of the two-year Treasury and briefly inverting, and other scary headlines. What to make of it, particularly the inverted yield curve talk?
The inversion of the yield curve is said to be a marker of pending recession. While that may be true, it’s only one signal and there are a number of considerations that must be weighed.
The front end of the curve is pricing in further reductions in interest rates by the Federal Reserve. The back end of the curve has other factors driving it, which include low to negative interest rates in other markets, making the US rates look relatively enticing, and a benign inflation outlook. Bonds have also attracted safe-haven buyers, driving down yields, in the face of equity market volatility. Yes, there are tensions. Yes, there is a trade war, and global growth is slowing. Germany and China are leading examples, but none of this is necessarily a marker of pending recession in the US.
While our manufacturing data has deteriorated, the consumer, 75% of the economy, continues to roll along. Low levels of unemployment accompanied by good wage growth have produced high levels of consumer confidence. It seems that when times are good, the consumer goes shopping. When times are not so good, a shopping trip makes people feel better. Consumers consume! And reflecting the strong consumer, we think US GDP should probably be in the range of 2% for the next 12 months. We’ll be continuing to monitor consumer confidence as a key support factor for our economy in the coming months.
What typically causes recessions is either loss of access to credit or a pullback in risk-taking behavior. Credit is still available and flowing from banks and other financial institutions. Further, incidences of stress, distress, and defaults are not spiking up, which would be a typical precursor for banks and markets to begin to withdraw credit availability. Pullbacks in risk-taking typically have a behavioral element. Certainly, the world, and markets, are flush with risks and uncertainties, perhaps more in recent weeks than earlier in the year. In past cycles consumers and corporate management teams have been occasionally inclined to pull back on their spending in response to heightened periods of uncertainty and its negative impact on confidence levels. For now, we don’t see this playing out to the degree that would result in a recession. FDR would say that “all we have to fear is fear itself.”
This information is intended solely to report on investment strategies and opportunities identified by Roosevelt. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. References to specific securities and their issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Please contact us at 646-452-6700 if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions, or if you would like to request a copy of our Code of Ethics. Our current disclosure statement is set forth on our Form ADV Part II, available for your review upon request, and on our website, www.rooseveltinvestments.com.
Past performance is not a guarantee of future results. Indices are unmanaged and cannot accommodate direct investment. Themes assigned as per Roosevelt Investments’ evaluation. Risk tools may include cash or other securities that we believe possess a low or inverse correlation to the overall market.
INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE