Our media loves a “good” story, even if they have to invent one. Today’s story from Media Groupthink Central (MGC) is the yield curve for US Treasuries has inverted and therefore is signaling an impending recession. Several carefully worded stories to this effect have been printed recently, along with others written more sloppily so as to state things incorrectly but, more important to the writer, ominously.
First of all, what does this all mean? What is an inverted yield curve? What is a recession? What does this all portend for our goal-focused, long-term investors/clients?
An inverted yield curve is one where treasury securities of shorter maturities yield more interest than those of longer maturities. This is the inverse of what’s typical – that is, usually the fixed income investor is rewarded for holding securities with longer maturities. The story goes, when this has happened in the past, it is the market’s way of forecasting that fixed income investors feel the economy will slow down in the longer term – possibly to the point of recession.
What is a recession? This is a period of time of at least two consecutive quarters where the economy contracts, or in amusing economic parlance, two quarters of “negative growth”- whatever that means.
Why are we supposed to think this matters? Because MGC implies from this “news” that long-term, goal-focused investors should abandon their plans so as to attempt to trade the theoretically impending sale of stock prices that they (MGC) further imply always coincides withrecessions. The reality is that stock prices do indeed tend to swoon in advance of recessions. They also tend to swoon temporarily for lots of other reasons. The old saying is that the market has “predicted” 8 of the last 3 recessions.
I’ll leave the nuanced economic details to others like Brian Wesbury, Chief Economist of First Trust Advisors, whose work we make available to you. But here are a few details of why MGC may be quite wrong about their implied impending disaster (beyond that recessions are never disastrous to long-term, goal-focused investors). First, whatever maturities may have inverted, the yield curve isn’t in a left to right downward slope. The US yield curve is in a V shape today, with the “shorter” long maturities yielding the least and the longer long ones yielding more than those. (Isn’t this fun?) If investors are indeed signaling anything, it would be that they think the Fed has raised short term rates too fast but that over the intermediate to long term the economy will continue to grow. That would be consistent to the message from Fed Chairman Powell recently that he feels this is an adjustment.
The next to last time a yield curve inverted – though differently from this- was the late 1990’s when the economics were quite different. Those facts haven’t stopped MGC from reporting that inversion as predictive of the same results this time. They fail to mention that the US stock market nearly doubled after that inversion, before ultimately nearly halving (back to where it was) during a decline that included the bursting of the dot.com bubble and the 9/11 terrorist attack. Meaning that acting on that “signal” would have led to an opportunity to break even after much heartache and only with the aid of some unusually unfortunate events. But that doesn’t make for a great story, does it?
Finally, as a reminder, our portfolios are not invested in any one country and certainly not one index. We have hired multiple consistent money management teams on our Clients’ behalf to select a widely diversified portfolio of nearly 1000 of the world’s biggest and best companies. The management teams of those companies are tasked with finding the best use of capital for the best return for the shareholders of those companies. Should any of those teams find it necessary to react to the economic changes here or abroad, rest assured they will do so (and likely before most of the main stream media noticed anything). None of this means the cumulative value of your portfolio can’t or won’t fluctuate. It will fluctuate far more than the actual value of the companies of which you are an owner, though throughout history, only temporarily.
As legendary portfolio manager Peter Lynch once said, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
Once again, we invite you to focus on what is in your control and most important to you and to turn off the incessantly shrill message of MGC. In the waning days of summer, please go watch the sunset with your loved ones.
-Michael Rogan
