Bill Poulos is the president and co-founder of Profits Run, Inc. He has been researching the Stock Markets for forty-five years. With his experience, Profits Run educates traders on making calculated investments. He created the Profits Run Starfish Award to celebrate individuals making a difference. Read below where he discusses the economy and the possibility of a recession.
Since the rate cut announcement on July 31st from Fed Chairman Jerome Powell, the 10-year Treasury yield has been on a free fall. Most recently, it’s approaching an all-time low.
That’s good news for new home and car buyers, though. Mortgage rates and auto loans use the 10-year treasury yield as a benchmark.
But the current yield of 1.595% – the lowest we’ve seen since fall of 2016 – may be a sign of something much less desirable for the rest of us.
According to some analysts, it could mean a forthcoming recession.
Recession fears were the motivation for Powell to cut rates to begin with, even though outside of treasury yields we’re not really seeing any other signs of economic slowdown.
The most recent jobs report displayed adequate employment numbers and according to the consumer confidence index Americans are still buying.
The only compelling alarm that’s been raised has to do with yields – the 10-year and 3-month Treasury yield spread, to be specific.
The economy entered a recession shortly after the last three times that yield spread inverted. It’s currently sitting in inverted territory.
Should you be concerned?
Possibly.
Should you begin freaking out?
Certainly not.
Opposite of what some analysts would lead you to believe, inverted yield spreads, particularly the 10-year vs. 3-month, are not the cause of recessions.
But they are symptoms of a bigger problem:
Economic instability, both at home and abroad, is frightening for investors.
It seems the “gloves are off” in the trade was, as China let their currency, the yuan, fall to a record low just before artificially increasing its value only a day later.
The Chinese central bank continues to bob-and-weave around every punch thrown at Xi and his cronies by the Trump administration, becoming a force of chaos.
And investors are worried.
Not due to China having the upper hand (they do not), but because anything is possible these days. How many times has a tweet from President Trump or a candid remark from Jerome Powell caused the market to implode?
Lest we forget about the recovery in early June, either. When U.S./China trade talks were going well, equities went on a rally for the history books.
This makes for a difficult time to invest, particularly as a “buy and hold” investor. It can be exhausting watching your portfolio balance plummet one week, just to rocket upwards the next.
And now investors are cashing out after the market faced its largest single day drop of 2019.
This in addition to rate cuts from central banks has caused Treasury bond prices to rise and yields to fall.
So, it could be argued that over the last few weeks, economic worries have not been the cause of yield spread inversion.
Nor were recession fears. Well, not valid fears, at least.
Rather, investors are simply sick and tired of the uncertainty brought on by the trade war with China. It’s difficult enough to stomach volatility without currency manipulation from a world superpower- something China seems intent on pursuing further.
And when the worlds’ number one exporter is fudging the numbers? All bets are off.
In other words, the 10-year/3-month yield spread won’t ne un-inverted by all the GDP growth and economic prosperity in the world.
A real trade war ceasefire can do this, regardless of whichever side truly “wins”.