The month of March is always interesting in terms of weather. You are never quite sure what you are going to get each day, and trying to forecast more than one hour ahead is a difficult task. That sounds much like our financial markets these days.
I can give you a passionate, well-researched and compelling case for the markets to move more than 10% in both directions. The difficulty level is so high, I asked my magic eight ball all the following questions:
- Will there be a recession in 2023?
- Will inflation continue to moderate over the next part of the business cycle?
- Are interest rates headed even higher?
- Will international investments outperform their domestic counterparts?
- Is the bear market for stocks over?
The magic eight ball consistently answered, “Reply hazy, try again.”
One thing that is not hazy is the current yield curve. The chart below shows the relationship between the yield of the 2-year Treasury versus the 10-year Treasury. As I write this note, the yield of the 2-year Treasury is 4.95%. The yield of the 10-year Treasury is 3.96%. In normal markets, the longer the maturity of your bond, the higher the yield you earn for that investment.
The term for the current situation is “inversion,” and it reinforces what everyone is talking about these days. Inverted yields are not a good sign for financial markets. It indicates a recession could be near.
In each case below, a recession followed shortly after the yields inverted. And some of those recessions included significant market events. To me, the better question is, “Will our next recession (there is always one coming) be shallow or deep?”
While each of the previous cases of inversion preceded a recession, a new bull market began right after the recession, and some of those bull markets were long and profitable for investors. Outlook hazy indeed!
Let’s consult with the magic eight ball again:
- Should we take advantage of higher interest rates and focus on increasing portfolio income? “Signs point to yes.”
- Should we remain focused on risk management in our approach to generating return in 2023? “Most likely.”
- Will the stock market set all-time highs someday? “It is decidedly so.”
Have a great month of March!