Yesterday, we woke up with a THUD…. And it wasn’t that Trudeau was caught breaching the ethics codes (again), it was to do with the inverted yield curve..

What is an inverted yield curve?

Simply said – It’s when short term interest rates are higher than long term interest rates – and if you listened to the media yesterday – it is a telltale sign of recession… and therefore the market sold off (down approx. 3%).

Did you just say we’re going into recession???

I’ve written and said this numerous times, every day we’re not in one, we are getting closer to one – so let’s make sure we position our portfolios to reflect that. Together, we’ve done some work in this regard already (shifted more to fixed income, taken some profits and raised some cash), and if you feel you need more of this, please call and book a meeting.

My thoughts:

So the yield curve inverted, Yes this is a good predictor of recession, however, it’s not an exact science… It’s not going to happen tomorrow – it could be in 3 months, 5 months, 9 months? Who knows? I do know that when the yield curve does invert - we still have some time to shift to a more conservative portfolio. See below chart.

I also know that we own good quality companies (best in class), that generally pay well and have staying power. So depending on your time horizon, we should be able to weather out any storm. If you have any questions about your time horizon and your portfolio please call me.

My Thoughts part 2:

I do know that geopolitical events and protracted uncertainty on trade is having some impact on business sentiment, on media sentiment… BUT, we’ve been living with this since Trump has been power… with little overall impact on the real economy. His recent tweets that he’ll delay new tariffs until after the Christmas season, showed the world that these tariffs are having an impact on consumer spending, and he blinked - at the same time that China’s lower exports (due to tariffs) have caused some weakness in its economy and Germany’s GDP was something left to desire, but…

US economy is still creating jobs, The Fed (central bank) has started to lower interest rates which is accommodating, and we’ve even seen some wage inflation. Europe is slowing down but GDP isn’t negative and neither is it here in Canada. In short, the actual economic data shows no real evidence that either the US or the global economy is approaching a recession. Slowing down does not mean recession – it just means slowing down (like going from 90km to 60km). Still going forward, just slower.

So what about that yield curve???

I think that the bond markets are still somewhat distorted from Quantitative easing (QE) and the role that central banks still play. I feel that the fixed income markets are betting that the Fed will continue to cut rates while ignoring the economic data. The markets and the Fed are looking at each other - listening to all the talking heads on CNBC and completely ignoring what is actually going on in the real economy.

If you are worried, and if you’d like to speak to me, please call, we can discuss your personal circumstances and review your portfolio. If there is anyone that you care about, who may benefit from the wealth management approach, please let me know. I would be glad to sit down and discuss their family’s needs and build a relationship for the markets of today and tomorrow.

Thanks

Christian