Economic Growth Has Peaked | Noisy Proclamations on the Bond Market and Yield Curve

Chris Perras: Viewers, everyone is now a bond market and yield curve expert. Turn on any financial news network the last two weeks and it’s a herd of analysts, strategists, economists, and hedge fund managers who manage everything from nothing to only high growth technology stocks, all commenting or pontificating their eloquent opinions on the recent treasury market yield curve “inversions”.

I’m Chris Perras, Chief Investment Officer at Oak Harvest Financial Group, and this is our investment team’s midweek release when we examine a news item, headline, or story making the rounds from publicly available sources, and we ask, is this news, or is this noise?
This week’s topic is the treasury bond market’s recent move towards inverting across different yield maturities and what it means to investors. Here’s the 10s minus 2s curve, which is the one that most people watch. As you can see, yes, this curve inverted on March 1st and stayed inverted for a total of two business trading days. From the stories on TV, you would’ve thought we just landed a man on Mars. First off, why do we follow and care about this data series?

Mainly because a yield curve inversion has historically and reliably been an advanced warning signal for stock market tops and economic recessions many months, quarters, and years down the road. We’ve discussed this subject of yield curve flattening and inverting in previous podcasts many times, well in advance of this day.

In fact, back in mid-2021, we released a podcasting forecasting its inversion in the first quarter of 2022, almost exactly 12 months from when it peaked the first quarter of 2021, so it’s arrived mainly on schedule and what does it mean? Is it news or is it noise?
Well, viewers, it’s news, but it’s the type of news that you shouldn’t panic over. Why is it news? Because it confirms what we already thought about the economy for months. What is that? That’s the rate of economic growth has peaked and it’s likely to slow throughout the summer of 2022. Does that mean it’s time to panic? Does that mean it’s time to call your advisor and sell your entire portfolio of stocks, which is supposed to be a tool for long-term financial planning?

No, not if you have a diversified portfolio, however, this is bad news if you were undiversified investor only owning a single economically sensitive sector or industry, but if you were a diversified investor owning a little bit of everything, some growth stocks, some dividend growth stocks, and some boring high yielding low growth dividend stocks, your portfolio are probably okay.
Are you up in your equity accounts here today? Probably not, but you have a balance to the ongoing sector rotations that keep whipping through the markets behind the scenes for the last 12 months.

Viewers, recall it was only six to nine months ago that these boring industries like healthcare, real estate, and consumer stable stocks were being shunned in favor of growth at any price stocks. Just think back six to nine months to what you were hearing on TV or reading in the newsletters. Defense stocks, viewers, the talk back then was you couldn’t own defense stocks because defense demand would decline as the Biden presidency would cut back on defense spending.

Oops, that’s not looking very good. That, of course, now looks very wrong and most defense stocks are trading near all-time highs. Also, just last year, you were not supposed to buy any drug stocks because the government was going to crack down on regulating drug pricing. Most drug stocks are now hitting new 52-week highs. I bring up one name everyone knows, Walmart, reported earnings only two months ago and some short-term investors were disappointed because they explicitly said they would not be passing along all their inflation costs to their customers.

Viewers, Walmart now is one of the few retailing stocks hitting new 52-week highs and all-time highs. Why do I mention these things? Because, viewers, the world and the markets don’t just stop because of some yield curve inversion that some smart guys on TV want to make a lot of noise about. That might be the world that a few hedge funds and strategists on TV might want you to believe in, but for 99% of us, saving and investing for retirement are about two things.

First, it’s about having a long-term savings, investment, and retirement plan that you stick with. Second, it’s about an asset and income diversification. Viewers, neither of these things should be changed due to the shape of the bond market’s yield curve structure. Viewers, the shape of the yield curve is a newsworthy story, but it’s not a story that should cause one to make large and radical changes to a diversified investment account or long-term financial plan.

Please give us a call here at Oak Harvest to speak to one of our advisors. Let us help you craft a financial plan that meets your retirement goals and needs first and your greed second. Our number here at Oak Harvest, 877-896-0040. We’re here to help you on your financial journey into and through your retirement years. I’m Chris Perras and from Troy, Jessica, and the whole team at Oak Harvest, have a great week.

News or Noise?

Newsworthy, noisy proclamations.

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