Financial Markets Commentary: Yield Curve Ripe for Misinterpretation

The Situation

Investor worries over an inverted yield curve has reached a fever pitch as the most well-known recession indicator on the street is taking center stage with slowing economic numbers.

We believe that the sheer mass of people using this indicator makes it less and less useful to predict a recession. In our experience, when so many people are watching the same thing in financial markets it ends up being more likely something that fakes investors out rather than something that can actually be traded upon.

One might say we are taking an “It’s Different This Time” approach, which is generally a bad decision for trading in capital markets. But we see the yield curve inversion as something that’s ripe for misinterpretation in this era of manipulated interest rates. And the still incredibly low short-term rate won’t make anyone jump to take money out of risk assets.

The Takeaway

We continue our call for an extremely weak first half of the year as consumers get past the government shutdown and companies work past the deep, 4th quarter selloff and the seizing up of debt markets.

Barring some existential shock, we expect the back half of the year to pick up nicely as more and more people forget about the recession talk. Instead, we think they will get back to running and investing in their businesses.

We also expect the housing sector, which was annihilated in 2018, to bounce back with a vengeance in 2019. It’ll only strengthen throughout the year with buyers getting more comfortable with higher prices as mortgage rates fall from the end of year spike.

And finally, as the economy stabilizes in the second half of the year, we believe long-term treasury rates will increase and with the Fed on pause, the yield curve to steepen from here.


Disclosures

Securities and advisory services offered through Centaurus Financial, Inc., member FINRA and SIPC, a registered investment advisor. Centaurus Financial, Inc. and First Franklin Financial Services are not affiliated companies. This presentation is for educational purposes only and is not intended for investment advice or a solicitation of services.