What You Should Know
Year-to-date, as of 3-31-2019, the S&P 500 Index returned 13.65%, the US Aggregate Bond Index returned 2.94% and the MSCI EAFE (global index) returned 12.18%. Given the overall equity rally, as expected, the VIX (volatility index) declined steadily over the quarter closing at 13.71. In a January 30 press release, the Fed appears to have transitioned to a dovish stance by declaring they expect to maintain or slowly adjust rates over 2019, a sentiment well-received by equity markets. Despite the return to strong equity performance, a yield curve inversion near the end of March stoked recessionary fears as media outlets opined on the significance and impact. We will explore this further to provide a better understanding of what it means and what to expect
Yield Curve Inversion: On Friday, March 22, the 90-Day US Treasury Yield briefly rose higher than the 10-Year US Treasury Yield for the first time since 2007, a movement that has preceded the last seven US recessions. From a historical perspective we know:
- There was one instance when a recession did NOT occur until three years after the inversion which lasted for less than a month’s time
- The time period between the beginning of an inversion to the start of a recession is on average a year or more
- In every scenario when this type of inversion has occurred, stocks rose about 15% on average over the following 18 months
What’s different now: The Federal Reserve has been artificially moving up short-term rates, while market forces and global demand has kept long term rates low. Given the Fed’s dovish announcement, the probability of at least one rate hike in 2019 fell from over 90% to 0%! Thus, we must consider the artificial nature of this inversion due to Fed intervention vs inversions that occur from more natural market forces. Since probabilities are not always certainties, we continue to monitor all economic indicators closely, specifically the difference between the 2-Year and 10 Year US Treasuries, which has decreased, but has not yet inverted.
The bottom line: While, the March 22 inversion is an important piece of data which we will continue to monitor closely, this does not mean we are entering a recession any time soon. Furthermore, we would need more data to support any conclusion of an imminent recession. In the meantime, historical data implies there is far more room for equity markets to move upward. In fact, from 1950 to 2019, there have now been 12 years where the S&P 500 total return was over 10% in the first quarter of the year. In only one year (1987) out of all 12 years, the S&P return was negative for the remainder of the year. As such, we believe it is prudent to maintain current positioning given a move away from equities immediately after an inversion has not previously been a rewarding decision.
Financial Advice is offered through Mid Atlantic Financial Management, Inc. (MAFM) a Registered Investment Advisor. Tempus Advisory Group is not a registered entity or a subsidiary or control affiliate of MAFM. The information contained in this e-mail and in any attached files is confidential and intended for internal use of the individual named in the email. This information should not be duplicated or distributed unless an express written consent is obtained from Tempus Advisory Group in advance. If you are not the intended recipient, please notify me immediately and delete any attachments. The views expressed here reflect the views of the Tempus Advisory Group Investment Committee as of 4-12-2019. These views may change as market or other conditions change. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Past performance does not guarantee future results and no forecast should be considered a guarantee either