Back in early March, within ChartTalkwe discussed what economic conditions would result in an inverted yield curveas we know that historically, investors are compensated for taking on more risk,and when it comes to fixed income (bonds), this manifests itself in the form ofhigher interest rates on longer-term bonds compared to shorter-datedissuances. The same thing can be saidfor Certificates of Deposit. The causeof an “inverted yield curve” results from the expectation that interest rateswill fall in the future, that economic conditions will weaken (see recession), orsimply, a greater demand for income producing securities that containrelatively little duration risk (the risk that changes in interest rates willsubstantially impact the value of the underlying fixed income securities priorto their maturity date).
As is illustrated by the chartbelow, the yield curve has been inverted for a longer period than any other inour history prior to the inception of a recession, 522 days.
The above lends credence to the statement once made byfamed economist Milton Friedman that Fed changes in Monetary Policy works witha “long and variable lag.” It also begsthe question as to how the stock market performs during a recession. Well, according to Russell Investments “16 ofthe 31 recessions that have struck the U.S. since the Civil War, stock-marketreturns have been positive. In the other15 instances, returns have been negative.” In other words, altering the percentages of equities as compared tobonds within your portfolio in anticipation of a recession is a crapshoot. Historically, it is notactionable information. It is with thisin mind that should conditions dictate portfolio changes, investors should becertain to maintain asset class weighting that conform to their long-termobjectives.
“This presentation is not an offer or solicitation to buy or sell securities. The information contained in this presentation has been compiled from third party sources and is believed to be reliable, but its accuracy is not guaranteed and should not be relied upon in any way, whatsoever. Fagan portfolio characteristics and holdings are subject to change at any time and are based on a representative portfolio. Holdings and portfolio characteristics of individual client portfolios may differ, sometimes significantly, from those shown. This information does not constitute, and should not be construed as, investment advice or recommendations with respect to the securities listed.
Additional information including management fees and expenses is provided on our Form ADV Part 2. The actual return and value of an account fluctuate and, at any time, the account may be worth more or less than the amount invested. Bond Investments are affected by interest rate changes and the credit-worthiness of the issues held in the portfolio. A rise in interest rates will cause a decrease in the value of fixed income positions. Past performance results are not indicative of future results.”
Copyright (c) 2024 Clearnomics, Inc. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. The views and the other information provided are subject to change without notice. All reports posted on or via www.clearnomics.com or any affiliated websites, applications, or services are issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Company fundamentals and earnings may be mentioned occasionally, but should not be construed as a recommendation to buy, sell, or hold the company's stock. Predictions, forecasts, and estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any security--including mutual funds, futures contracts, and exchange traded funds, or any similar instruments. The text, images, and other materials contained or displayed in this report are proprietary to Clearnomics, Inc. and constitute valuable intellectual property. All unauthorized reproduction or other use of material from Clearnomics, Inc. shall be deemed willful infringement(s) of this copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. Clearnomics, Inc. expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. Clearnomics, Inc. reserves the right, without further notice, to pursue to the fullest extent allowed by the law any and all criminal and civil remedies for the violation of its rights.
One of our favorite econominists, Torsten Slok, from Apollo AssetMangement recently released a chart detailing the shift in the yield of the 10-YearU.S. Treasury Note. Slok noted that “Sofar, 10s have been moving around one-to-one with Fed expectations (see chartbelow). But in recent weeks, a gap hasopened up, suggesting that other factors, perhaps including the fiscal outlook,are beginning to play a role for long rates.”
In ouropinion, Slok has concluded that given the spread between the differingmetrics, investors are beginning to get worried about the health of the financialmarkets and global economies. Slok contraststhe signals that a rate cut is in order, namely a slowing economy, weak ISMnumbers and unemployment ticking upward versus various forces putting upwardpressure on inflation – deglobalization, immigration uncertainty, defensespending, and the ongoing transition in the energy market.
What we do knowis that investors hate unknowns – and with so many unknowns out there, they willflock to safe havens, which as you can see, are shorter duration assets. All things being equal, that incrementalincrease in demand for those securities in turn pushes longer duration assetshigher. We are of the opinion that as wedraw nearer to the election, the yield on the 10-Year Note will begin tostabilize as the path the country will be about to choose from both a monetaryand fiscal perspective, becomes clearer.
“This presentation is not an offer or solicitation to buy or sell securities. The information contained in this presentation has been compiled from third party sources and is believed to be reliable, but its accuracy is not guaranteed and should not be relied upon in any way, whatsoever. Fagan portfolio characteristics and holdings are subject to change at any time and are based on a representative portfolio. Holdings and portfolio characteristics of individual client portfolios may differ, sometimes significantly, from those shown. This information does not constitute, and should not be construed as, investment advice or recommendations with respect to the securities listed.
Additional information including management fees and expenses is provided on our Form ADV Part 2. The actual return and value of an account fluctuate and, at any time, the account may be worth more or less than the amount invested. Bond Investments are affected by interest rate changes and the credit-worthiness of the issues held in the portfolio. A rise in interest rates will cause a decrease in the value of fixed income positions. Past performance results are not indicative of future results.”
Copyright (c) 2024 Clearnomics, Inc. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. The views and the other information provided are subject to change without notice. All reports posted on or via www.clearnomics.com or any affiliated websites, applications, or services are issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Company fundamentals and earnings may be mentioned occasionally, but should not be construed as a recommendation to buy, sell, or hold the company's stock. Predictions, forecasts, and estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any security--including mutual funds, futures contracts, and exchange traded funds, or any similar instruments. The text, images, and other materials contained or displayed in this report are proprietary to Clearnomics, Inc. and constitute valuable intellectual property. All unauthorized reproduction or other use of material from Clearnomics, Inc. shall be deemed willful infringement(s) of this copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. Clearnomics, Inc. expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. Clearnomics, Inc. reserves the right, without further notice, to pursue to the fullest extent allowed by the law any and all criminal and civil remedies for the violation of its rights.
According to the National Bureau of Economic Research,“excess savings can be calculated by measuring the accumulated difference inactual de-annualized personal savings and the trend implied by data for theforty-eight months leading up to the first month of the 2020” and it, alongwith other data, is intended to predict the strength of the economy, given thatconsumer spending represents nearly seventy percent of Gross Domestic Product(GDP).
Up until now, the American consumer has showed remarkableresilience despite being negatively impacted by rising costs and we believethat the chart below goes a long way in explaining this strength. In addition, keep in mind that nearly fortypercent of American homeowners have no mortgage and, of those that do, nearlysixty-percent have fixed rates below four percent, another reason why the Fed’stight monetary policy is working with more of a lag than during previouseconomic cycles.
As is illustrated by the chart below, the Excess Savingsthat had been accumulated from the onset of the Pandemic, peaked at $2.1trillion in August 2021 and has since been depleted leaving many to wonder whatthe impact of this might be on economic activity.
In our opinion, expect a measurable, but modest slowdown in consumer spending that will become apparent as we approach the election. Whether or not the slowdown will be enough to warrant a Fed rate cut prior to the election remains in limbo.
“This presentation is not an offer or solicitation to buy or sell securities. The information contained in this presentation has been compiled from third party sources and is believed to be reliable, but its accuracy is not guaranteed and should not be relied upon in any way, whatsoever. Fagan portfolio characteristics and holdings are subject to change at any time and are based on a representative portfolio. Holdings and portfolio characteristics of individual client portfolios may differ, sometimes significantly, from those shown. This information does not constitute, and should not be construed as, investment advice or recommendations with respect to the securities listed.
Additional information including management fees and expenses is provided on our Form ADV Part 2. The actual return and value of an account fluctuate and, at any time, the account may be worth more or less than the amount invested. Bond Investments are affected by interest rate changes and the credit-worthiness of the issues held in the portfolio. A rise in interest rates will cause a decrease in the value of fixed income positions. Past performance results are not indicative of future results.”
Copyright (c) 2024 Clearnomics, Inc. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. The views and the other information provided are subject to change without notice. All reports posted on or via www.clearnomics.com or any affiliated websites, applications, or services are issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Company fundamentals and earnings may be mentioned occasionally, but should not be construed as a recommendation to buy, sell, or hold the company's stock. Predictions, forecasts, and estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any security--including mutual funds, futures contracts, and exchange traded funds, or any similar instruments. The text, images, and other materials contained or displayed in this report are proprietary to Clearnomics, Inc. and constitute valuable intellectual property. All unauthorized reproduction or other use of material from Clearnomics, Inc. shall be deemed willful infringement(s) of this copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. Clearnomics, Inc. expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. Clearnomics, Inc. reserves the right, without further notice, to pursue to the fullest extent allowed by the law any and all criminal and civil remedies for the violation of its rights.