At a training session in the heart of the financial district in Toronto about a decade ago this weird thing happened. My classroom cohorts were middle-aged bankers. That’s not the weird thing. A little crow’s feet around the eyes, some salt and pepper around the temples are common assets for investment advisors. Invokes a sort of sagey, wisdomy feel. As cheese, we’d have been a sharp bunch — with hardly any mould.
Anyhow, the weird thing I mentioned earlier, not the cheese – I’m getting to it. As we were moving from one seminar room to another, a group of about 30 very well-dressed preppy-looking boys and girls were migrating the opposite way for the same reason. Crisp, pressed business suits and skirts, fresh haircuts, pointy shoes – really pointy shoes. A very handsome young bunch. And not chewing gum.
It was about as downtown as Toronto gets. Big bank blocks busted out all around us, interspersed with world class hotels, trendy restaurants. And yet, amidst the stack of corporate concrete, there was apparently a high school! Interesting.
The actual weird thing happened next. At lunch I went for a little walk and came across a nearby classroom there on the 239th floor, and saw those same kiddies sitting down to their mid-day meal. No Spiderman lunchboxes. No Disney Princess pencil crayon bags. There was a sign on the wall next to their classroom door which read:
RBC Capital Markets – Financial Analyst Team
The Brain Trust.
Twenty-somethings, not grade schoolers. It occurred to me that the crispiness of their countenances was a function of my raisin-ness, not their grape-ness. While they were calculating regression analyses on bionic Bluetooth eye-abacuses, I was getting long-jowled, fighting off my afternoon nap by telling boring analogue banker stories.
Speaking of which…
The Ancient Millionaire:
On the other end of the expertise spectrum we have this old guy, Jill Allworth, (his real name). Our chief investment strategist, All-worth has been on the money for as long as I can remember. Nobody knows his real age, but he once took a bus load of grandchildren to watch the Vancouver Millionaires (their real name) win the Stanley Cup at the old Denmen Arena near present day Cole Harbour. He says 1915 was a good year.
Silly hyperbole aside, below I’ve included some snippets of Jim’s latest wisdom on on yield curves, economic cyclicality, and money. Seriously, when Jim speaks, I perk up.
All about the R-word:
Despite the wonderful track record of yield curve inversion as a recession/bear market early warning, we believe this time the economy and markets will undoubtedly wind up being different in some important aspects. That should make investors reluctant to bank everything on just one indicator, no matter how historically reliable.
Our U.S. recession scorecard follows six indicators, all of which have usefully warned of recessions ahead of time. Three (the yield curve, unemployment claims, and the Conference Board Leading Economic Index) have all given their signals about a year ahead of any previously imminent recession. Other signals typically flash red much closer to the event. To date, only the yield curve has given a warning.
Indicators aside, we believe it will take some doing to get the U.S. into recession from here. One need only check in on the American consumer who thoroughly dominates the U.S. economy at almost 70% of GDP. Consumers are confident and for many good reasons. The unemployment rate was last below 4% in the mid-1960s; unemployment claims recently hit all-time lows; there are 7.6 million unfilled jobs, according to the US Labor Department; wage rates are rising nicely; home values and other components of household wealth are elevated and don’t look frothy or otherwise overly vulnerable; and consumer spending has remained mostly in line with income growth, suggesting household debt has not become unmanageable.
Jim Says Stay in Your Lane, for Now
The inversion signal has always been hard to get behind precisely because it has given such a long early warning. It is usually followed by several quarters of positive economic growth—one such interval lasted almost two years. And the stock market typically has some months or even quarters to go before it sets its final high. It is difficult for investors to adopt a defensive approach when the economy continues to perform and earnings look set to go on growing.
Most stock markets are still below last year’s highs and about at the same level as 12 months ago. Price-to-earnings multiples are no longer as extended as they were in early 2018. We have been impressed by the power and breadth of the liftoff from the December low point. We expect new highs lie ahead for the U.S. broad averages and for most developed-economy stock markets.
We are content for now to maintain our benchmark target weight exposure to stocks in a global portfolio. However, we are treating the inversion of the yield curve as a “shot across the bow” for equity investors. We expect to counsel the adoption of a progressively more defensive posture over the course of the next six to 12 months.