The Two Major Risks For Investors Today
What Could Go Wrong?
The U.S. yield curve is the most inverted since early 2000, with 2-year notes trading at a 33-basis point yield premium to 30 yield bonds.
The correlation between inverted yield curves and recessions and bear markets is almost 100%. There may be an instance when an inverted yield curve did not produce a bear market, but I have yet to identify one.
For investors, two major concerns present themselves. The first is though the yield curve is already significantly inverted, it has likely much further to go. The fed has given no reason to doubt that it will continue to aggressively raise interest rates until a sharp recession is provoked that will dampen inflationary pressures. Thus far, economic measures have not provided evidence that the current recession has developed sufficiently to cause a halt and subsequent decline in interest rates. As the yield curve further inverts, the negative effect on the economy and corporate earnings will worsen.
The second factor that should concern investors is the substantial apathy that exists in the capital markets. That was illustrated by the sharp declines produced by the latest Fed meeting and inflation report. Markets continue to be in denial about the path of interest rates and appear to be embracing that economic unicorn, the “soft-landing.” The very positive expectations currently priced into markets raise the risk of sharp market volatility when reality is eventually embraced.
We remain very concerned about the risk/reward proposition currently offered by markets. The volatility we see ahead will represent substantial risks but also great opportunities for the prepared investor, which we’ll identify as they appear in the Global Investment Letter.
Each month in the Global Investment Letter I update my investing activities, as well as comment on major global equity, fixed income, currency, and commodity markets.
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