Originally published April 16, 2022
Almost every day some YouTuber, Analyst, or Media Talking Head yells out a warning that all of a sudden this issue or that issue is about to crash the stock market. The issue could be the inverted yield curve, inflation, government spending, housing prices, and maybe even avocado pricing. These statements are scary for sure, but in the end, they are all mostly noise and already priced in the market. Or are they?
What will send the market down big time? Well, it’s usually something no one sees coming (pandemic) or a recession, but not always. Sometimes it’s a change in expectation that affects the broader supply and demand of stocks. Lots of things can send the market up and down; a continuous battle rages on day after day where normally not one but many complicated forces end up pushing prices up or pulling them down. Most often it’s difficult to say why the market went up or down on any given day or week unless it’s an obvious big overwhelming force.
What About the Yield Curve
The yield curve is supposed to be a predictor of recessions. Historically it has been extremely accurate but the context is important. A quick primer on the yield curve! What the hell is it? In simple terms, it’s merely a line on a graph outlining interest rates on government bonds starting at the 3-month, then 6-month, 1-year all the way to 10 years. Normally the rate you get on a 3-month bond is lower than on a 10-year bond. If you graph this out, you get an upward-sloping curve. This is considered normal as you would expect a higher return for locking in your money for longer.
Recently this curve inverted meaning you get a better return for shorter-duration bonds than on the longer 10-year bond. Weird right? Every recession in modern times has had an inverted yield curve and the internet is buzzing about this because it just happened. But to be fair, there have been false positives and there are no standards associated with the quality of the yield curve inversion. It merely inverted a little, sort of… but is that enough? Secondly, there are only a few economies in the world with inverted yield curves. So it’s really not a strong argument for a worldwide recession. It normally needs to be stronger across most economies.
The yield curve is not the only recession indicator in town either. There are two other recession indicators that have also been really good at predicting recessions:
- The Conference Board’s Leading Economic Index (LEI), which uses the yield curve and a host of other inputs to measure the future. At this time it is strongly on the positive side meaning no recession.
- Sahm rule, which uses unemployment data to measure the likeliness of a recession. It’s quite accurate for USA data but more inconclusive in other economies. It also is not indicating a recession.
So basically there are no credible economic data points at this time that are forecasting a recession. In addition, a recession in economic terms is technically two back-to-back quarters of negative GDP growth where the data has a huge time lag. You could be in a recession and not even know it. In many recessions in the past, surveys indicated that most people thought the economy was actually fine. So unless they are really bad, they are most often not even noticeable.
Now the weird part: even if the economy was in a recession, it does not mean the stock market will fall… usually it does, but not always. It’s because these are not the same thing. The stock market is forward-looking while recession data is backward looking.
So Is There a Looming Recession?
So any fear-mongering in the media about recessions today is without merit and in a way is bullish for the stock market. Recessions from time to time are normal as are stock market crashes. It all comes down to how the small investor reacts to these normal events that separate the good from the bad investor. If you get scared out of the market after it crashes you miss out on the run back up. If you are too early and there is no crash, you may wait years for one and forgo good returns. As always there is no way to time the market. It’s time in the market not timing the market that works.
Looking Forward
I will not lie, it’s still weird out there. I do worry about that unknown issue that might catch us by surprise. But what is it? Run away interest rates? Run away debt? Nuclear war? So many to choose from, yet no obvious menace that is not already known to some extent. I am quite happy to stay 100% in quality equity over diversified positions. It continues to provide some outperformance, for now.
Happy investing.
Marc’s Monthly Moves
- Nada.
Marc’s Portfolio YTD Performance
- Portfolio return -4.7% (Including currency losses)
- Portfolio return -4.5% (without currency losses)
- SP 500 return -7.85%
- TSX return +3%
The portfolio overperformed the S&P 500 by 3.35%.
Money with Marc 