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Recession Data and Yield Curve - 5 Bullets

Recession Data and Yield Curve - 5 Bullets

August 16, 2019
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While recent market movements have been well-publicized, a few things that aren’t making the main headlines:

  • Historically, just because the 2y - 10y treasury yields invert does not necessarily signal a recession unless the inversion lasts for 10 weeks.  This inversion didn’t even last for a day-yet.
  • Recessions typically occur within 18-24 months of inversion, with a historical average of 22 mos.
  • Historically, S&P 500 has returned 12% on average over the 12 months following a 2-10 inversion, with the market not taking loses until 18 months or so.
  • Fears are largely global-with soft data from the UK, Germany, France, and China.  Trade and Brexit are also obvious contributors.  Negative rates abroad have caused additional US Treasury purchases, placing downward pressure on yields. 
  • Recent US data has been solid.  Unemployment is still incredibly low and consumer spending is strong-as echoed by today’s retail data beating estimates.  Manufacturing and New Order data also exceeded expectations.  None of us can predict the future, but absent some exogenous shock, there’s nothing yet to suggest a recession until late 2020 at the earliest, if at all.  Further, policy is a contributing factor for the U.S. and China, so some of the fears and impacts could be undone.  While Europe would also benefit from that, they have structural issues that extend beyond trade.  We recommend continuing underweight of Non-US equity.