There are a enough indicators to suggest we’re already ‘in’ a recession. But, you say, GDP stats that have been published remain positive. As I learned decades ago, historical data doesn’t tell us much – its published with a delay that can mean missing big moves in markets – and costing lots of money. I recall waiting a year before the data confirmed that a recession had occurred. Note the past tense…had occurred.
Although there’s been a reluctance to use the R word in the media of late, it wasn’t long ago that the term was tossed about quite readily. I believe it was last August that the 3-month T-bill rate was above the 10-year rate (however briefly) indicating an inverted yield curve. This is important because most of the time an inverted yield curve suggests a recession will come. Yes that was some time ago. Consider this from an old Fortune Magazine article (August 13, 2019):
“This signal hasn’t worked on a set schedule but every time the 10 year treasury has yielded less than the 2 year treasury, a recession has shown up eventually. The average lag time is roughly 17 months from the time the yield curve inverts until the onset of a recession, but the timing of the results can vary.”
So, it’s been barely 6 months since that ‘signal’ but we’re seeing a plethora of evidence that a recession is already here. And although I’ve heard little mention of it, the yield curve seems to be giving us yet another more current reminder.
If we can believe there’s more evidence pointing at recession, then it seems likely the long end of the bond market may soon drift downward (but certainly not upward), and the short end will drift upward until the yield curve is fully inverted which will spook markets that are already cowering. What evidence?
- Oil & other commodity prices are falling
- The Coronavirus is devastating supply chains
- An uncertain election is looming
- Markets are falling despite strong recent earnings announcements
The long end of the bond market may be the safest place to park – so perhaps head that way in your fixed income strategy.
MORE EVIDENCE: The Baltic Dry Index peaked around the same time the yield curve first inverted. A reliable indicator as well (if notoriously overlooked) it suggests we’ve been heading towards a recession since the first yield curve inversion last year. It has fallen nearly 80% since back then.
But make sure your bond ETF is not loaded with corporate bonds. Spreads have narrowed recently which has contributed to the performance of these funds, but they’re beginning to widen. This phenomenon is also evidence of recession. This should continue and will mean those corporate bonds will hurt performance – especially the longer duration ones. Stick to government issues.