Inverted Yield Curve Bears

For the moment it appears that the FOMO trade mentioned last week has given way to the bears favorite theme that an inverted yield curve is happening and will likely lead to a U.S. recession sometime soon. I have talked about the inverted yield curve before (when the 10-year Treasury yield sinks below the 3-month Treasury bill yield) and it happened last week for the first time since 2007. Weakening manufacturing data last week was the latest reading to unleash a fairly robust rush of algorithmic sell programs Friday that pushed the leading market indexes down for the week. Whether this signal is truly the beginning of the ticking timeclock related to the lead time before the next economic recession is debatable and more economic data is needed in my opinion before we start worrying about how deep the next recession will be and whether we need to revamp portfolios for tougher economic times.

Nevertheless, while the inverted yield curve is debatable what seems clear is that anytime the term inverted yield curve hits the news wires the program traders receive the key words and unleash a barrage of sell programs based on a formula that is set to initiate sell S&P 500 index stocks and options. This pressure can be heavy as we witnessed last November and December and deserves our attention to be taken seriously now that it is happening again. I will be watching carefully for additional signals that could unleash more selling and look to raise cash quickly if that occurs.

Like a good boy scout I want to be prepared and remember the damage caused by unrelenting sell programs against a more timid buying public. However, there is a positive backdrop to this inverted yield curve debate and that comes in the form of a totally dovish Federal Reserve that indicated last week that they are definitely on hold and not to expect any interest rate increases for the entire year as indicated in their dot plots. This means that interest rates will remain lower for longer and should start to stimulate more housing refinance activity as well as other loan demand due to attractive interest rates. It should also stimulate home refurbishment activity right before the key spring selling season for Home Depot and Lowes Home Improvement. I expect both of these companies to have a stellar spring season and the stocks to reflect this enthusiasm with increasing stock prices.

In addition, lower for longer interest rates will also allow our utility, telecom, and REIT investments to continue to work higher as holders feel more secure that interest rates won’t be suddenly jacked up to damage their returns. Therefore, stocks like Consolidated Edison, Duke Energy, Dominion Energy, Verizon, AT&T, Ventas, and Welltower Inc. continue to make sense in a diversified portfolio.

Finally, I am not giving up on our favorite growth stocks and themes. While some profit taking due to recent advances seems plausible I would remain a buyer on weakness of any strong growth stocks that gets caught in a sell program from bad headline news. As the Hills Street Blues sergeant tells his street cops “let’s be careful out there” is appropriate but let’s take advantage of any unrelenting and unnecessary selling that comes along.

Have a great week,

Roger N. Steed

March 25, 2019

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