Yield Curve Special — Isn’t Necessarily a Recession Warning, Hysteria, and Will it Lead To A Recession?

Here are the top 3 insights for August 19th.

Today’s Brief

• Alliance Bernstein: Why Today’s Inverted Yield Curve Isn’t Necessarily a Recession Warning
• Franklin Templeton: Yield Curve Hysteria
• Invesco: Will the inverted yield curve lead to recession?

Why Today’s Inverted Yield Curve Isn’t Necessarily a Recession Warning

• The most closely watched part of the US yield curve inverted this week for this first time since 2007, suggesting that a recession may be around the corner.
• We’re not convinced that’s true.
• Don’t get us wrong, recession risks have increased over the last few quarters and investor caution is warranted.
• But while we expect the US and global economies to slow to their trend rate of growth, we’re not expecting contraction.
• And while risk assets sold off sharply following the inversion, it’s important to keep things in perspective.
• Prior to Wednesday’s selloff, the S&P 500 index had risen by more than 18% this year.

Genuine Scores for the top 3 US focused Equity Funds:

• USQ Core Real Estate Fund, 100
• PREDEX, 99
• Versus Capital Multi-Manager Real Estate, 97

Yield Curve Hysteria

• I see a glaring contradiction in the fact that so many market participants and commentators emphasise the heightened level of economic uncertainty, and at the same time seem to consider flat or inverted yield curves as foolproof predictors of a recession.
• I see this as completely misguided — I think the yield curve is telling us nothing about what lies ahead for the real economy.
• Yes, protracted uncertainty on trade is having some impact on business sentiment.
• But we have lived with trade uncertainty for almost three years now, with very little economic impact.
• The US economy is holding up well, and now it benefits from a more dovish US Federal Reserve (Fed).

Genuine Scores for the top 3 US focused Bond Funds:

• AAAMCO Ultrashort Financing Fund, 100
• Goldman Sachs Access Treasury 0–1 Year ETF, 100
• iShares Ultra Short-Term Bond ETF, 100

Will the inverted yield curve lead to recession?

• The US Treasury yield curve, specifically the spread between the 10-year US Treasury rate and the 2-year US Treasury rate, briefly inverted on the morning of Aug. 14.
• As of early afternoon, the spread was roughly 1 to 2 basis points wide.
• The brief inversion follows the inversions earlier this year between the spread of short-term rates (such as the federal funds rate and the 3-month Treasury bill) and the benchmark 10-year rate.
• The equity market immediately sold off due to fears of a looming recession — of all the macro indicators, the bond market has tended to get it right more often than most others.
• Case in point: An inverted yield curve that lasts for a prolonged period (not briefly in one morning!) has preceded seven of the past nine recessions.
• And in those seven time periods, the US economy tipped into a recession 22 months following the inversion, on average.
• Interestingly, stocks, as represented by the S&P 500 Index, have been positive, on average, in the 12 months following the yield curve inversion.

Genuine Scores for the top 3 Globally focused Equity Funds:

• Bluerock Total Income+ Real Estate Fund, 99
• Fidelity Advisor Series Growth Opportunities Fund, 92
• Lindsell Train Global Equity, 91

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All the best,
Genuine Impact Team

p.s. all Genuine Scores are accurate as of the 15th of August