The Yield Curve Inverted. Don’t Panic.
You may have heard that the U.S. Treasury yield curve inverted on March 22nd, for the first time since 2007, and wondered what this might mean for your investment strategy.
An inverted yield curve occurs when the interest paid on (shorter-term) 3-month Treasury bills is higher than the interest paid on (longer-term) 10-year Treasury bonds. It can signify that those who lend money anticipate lower economic growth ahead – but it’s only one market indicator.
When developing our investment outlook, we consider several factors, including:
1. The spread of the yield curve. While an inverted yield curve has, historically, been considered a predictor of economic recession, not all inverted yield curves have led to one. There have been two out of 11 inversions since the 1960s in which an economic recession did not follow, in 1966 and 1998. It’s likely that current conditions most resemble the 1966 inversion.
2. Economic growth. The employment picture appears healthy, with 263,000 jobs added in April and jobless claims on the decline. Corporate bond spreads have been steady to declining, which is also seen as a positive sign for the economy. In addition, the Evercore ISI Truckers Survey (an indicator highly correlated with GDP growth) has ticked higher recently, leading us to remain optimistic on near-term economic growth.
3. Corporate earnings. An earnings recession is defined as two quarters of negative corporate earnings. Although 1Q19 earnings had been forecasted to decline from last year, the results so far are trending flat to potentially positive. Earnings estimates for next quarter remain positive.
Despite the temporary yield curve inversion, we believe the equity markets have reestablished the uptrend and we expect to see further gains in the months ahead. As we have pointed out over the last few quarters, volatility is likely to remain and should be expected at this point in the cycle.
Luma Wealth is committed to helping clients achieve their wealth goals through a customized and diversified long-term approach to investing, and you can rest assured that our portfolio managers diligently and regularly monitor market factors and adjust our investment views accordingly.