Home|Our Services|Our Philosophy|Client Center|Planning Ideas|Resources|Disclosure|Contact Us

Financial Briefs

More Articles  Printer Friendly Version

 

Is The Inverted Yield Curve The Financial Fakeout Of 2019?

The day the yield curve inverted, on Wednesday, August 14th, stocks plunged and financial headlines turned grim.

Should you worry? Or is the yield curve inversion the financial fakeout of 2019?

"Longer-term rates below shorter term rates are a clear signal from bond investors that they think the United States economy is on the downswing," reported The New York Times' senior economics correspondent, Neil Irwin, "that its future looks worse than its present." But this widely-reported storyline in the financial press misses important context.

In the past, when the yield curve inverted, it was usually because investors saw fundamental economic measures deteriorating, but that's not happening now. Rear view mirror investing — assuming history will repeat itself — is not smart in current conditions, because unprecedented negative yields in Europe and Japan make the road ahead different this time.

At the same time stocks plunged on recession fears triggered by the yield curve inversion, the retail sales report from the U.S. Census Bureau in the 12 months through July surged 3.7%! That followed a 3.8% spike in June and a 3.1% rise in May. Since 70% of U.S. economic activity is consumer driven, the continued strength in retail sales extinguished recession fears. When consumers are spending like this, a recession cannot be unfolding.

The retail numbers are part of a growing body of evidence that the yield curve may be making a recession look much closer than it actually is. It's a broken indicator.

This doesn't mean the yield curve is not a useful forecasting tool. It just means it's not a useful tool in the current economic situation. A hammer can't fix every problem.

And things really are different this time because the current inversion of the yield is caused by an unprecedented condition: Negative yields in Europe and Japan, which are depressing yields on long-term U.S. bonds!

From a prudent professional's perspective, the inversion is a technical market problem of supply and demand and not a "real" economic problem. It's wise to plan on your retirement portfolio's fixed-income allocations yielding lower returns in the years ahead, but that doesn't mean the U.S. is headed for a recession. Fears about the inversion of the yield curve heightened stock market volatility but that does not mean the decade-long, expansion-fueled bull market is over. It seems likely to turn out to be the financial fakeout of 2019.


Email this article to a friend


Index
Don't Be Deceived By New Tax Law's Name
China Poses A Hidden Risk For Many 401(k)s
Growth Of The Consumer Class And The Investment Outlook
Exceptions To The New Rule On Inherited IRAs
Repeated Tax Reforms Raise The Risk Of Doing Nothing
Boomers Working Past Age 65 Are A Surprise Boost
Study: Wall Street's Tactical Methodology Isn't Working
Three Major Investing & Tax Planning Trends For 2020
SECURE Act Is Law: Last Call For 2019 Tax Savings
Performance Anxiety: A Leading Cause Of Investor Dysfunction After Age 55
How Worldwide Demographics Affect Your Portfolio
Financial Lifeboat Drill For Mustering In Emergencies
Hiddenomics™ Challenge: Find The Leading Economic Indicators
20-Second Year-End Tax Planning Quiz For Pre-Retirees
Last Chance In 2019 For Pre-Retired Professionals & Biz Owners
The Fed Just Cut Rates Again; What's It Mean To You?

This article was written by a professional financial journalist for William Howard & Co. Financial Advisors, Inc. and is not intended as legal or investment advice.

©2020 Advisor Products Inc. All Rights Reserved.
© 2020 William Howard & Co. Financial Advisors, Inc. | International Place II | 6410 Poplar Avenue, Suite 330, Memphis, TN 38119 | All rights reserved
P: 901-761-5068 | F: 901-761-2217 |
Disclosure | Privacy Policy | Contact Us