Watching the news these days has kept all of us up at night with all sorts of anxieties. We are doing all we can to keep your portfolio and you safe. Yet, here are some considerations for how you can help others and yourself as we get through this tough time:
We have just begun the second quarter and it is certainly not short of headlines. One of the biggest headlines circling now is that the 2-year/10-year Treasury rates have inverted for the first time since August of 2019 which means the 2-year rate is now higher than the 10-year rate. To most this doesn’t seem significant; however, in the world of financial markets, it is a potential recessionary signal. The reason for this is mainly because it is perceived that short-term rates are beginning to get too high for the economy to handle, thereby resulting in a potential slowdown in economic activity. So, are we in for an inevitable recession now?
There couldn’t be a greater question to ask as inflation is rampant in all parts of the economy, consumer confidence is wavering, and the Federal Reserve looks more aggressive on future rate hikes. We want to emphasize, however, that while the odds of a recession occurring are increasing, they remain low and is not our base case at this time. First, while the 2-year/10-year treasury inversion has been a reliable indicator of a future recession, it has historically operated with a very long lag, meaning one will very likely not occur within the near- to intermediate-term. In fact, after this type of inversion, going back to 1980, a recession occurred on average roughly 14 months after the inversion. Second, unlike in 2019 and numerous past readings, the current number of inversions is relatively low indicating a “danger” signal has not yet been reached and the economy very likely still has a good amount of room to grow this year. There is also currently a mix of both economic headwinds AND tailwinds, which is another reason why a recession is not our base case. For example, a few headwinds are high inflation in food, energy, and housing, rising rates, and geopolitical tensions but on the flip side a few examples of tailwinds are a tight labor market, continued pent up demand, and large savings. Due to this, there will very likely be a push-pull like environment on the economy and financial markets this year. Just because the risk of a recession is low does not mean markets are necessarily off to the races, but rather they will very likely continue to remain choppy and range bound at times as the markets digest many different factors.
As a result, we continue to hold and seek to add to higher quality – higher dividend investments to take advantage of the shift to these areas of the market while still generating income without the negative effect rising rates have on longer-term bonds. This flexibility is one of the tremendous advantages of active management. If you have any questions about what we are currently seeing in markets, or any other questions please feel free to contact us and we would be more than happy to answer them all.