https://www.frbsf.org/economic-research/publications/economi... Federal Reserve Bank San Francisco the term spread has a strikingly accurate record for forecasting recessions. Periods with an inverted yield curve are reliably followed by economic slowdowns and almost always by a recession. While the current environment appears unique compared with recent economic history, statistical evidence suggests that the signal in the term spread is not diminished. Always keeping in mind that onset of recession is too late for an investor, we need to be 6 ?? or 12 ?? months ahead of the recession to avoid big losses. Other measures of "short" vs "long" might work better for us but I have not explored that. It could also be combined with unemployment rates as I have discussed before Most all timing near tops is done with prices which thus seem to share the same limitations. Especially that bulls roll over slowly. Interest rate inversion and unemployment bring an additional dimension.Too bad those over on the other board are convinced that timing can not be done. Because in fact it can be done Not perfectly ,but enough to shift the odds. In a bear, the bear overwhelms almost any stock specific move.I am reminded of Buffett's ? remark that he was glad so many people were convinced that beating indices is impossible, it's easier to win when the others are not even trying .There is no reason you need to time all your portfolio. If buying more than one stock is tactical diversification, doing timing with some of your investing is strategic diversification
this relationship holds not only in the United States but also for a number of other advanced economies (Estrella and Mishkin 1997). The term spread is one of the most reliable predictors of future economic activity among a wide range of economic and financial indicators The delay between the term spread turning negative and the beginning of a recession has ranged between 6 and 24 monthsSo act quickly allowing the level of interest rates to have a separate effect from that of the term spread—shows that only the difference between these interest rates, the term spread, matters for recession predictions. Personally I believe that toady’s world is not only safer than the world of 50 or more years ago but that capitalism and the on-rush of innovation has resulted in deflationary pressures and lower natural interest rates,. This increases the return gap between equity and bonds. But will not stop recessions, a natural cleansing process of the system. This result is robust to using a number of alternative estimates of the term premium in the predictive models. like similar results in other countries, this is a strong bit of evidence that this effect is not some statistical fluke . Keeping in mind that the number of recessions is itself a small number For a fall in stock price we do not not need a recession, a well publicized threat of one or just a noticeable slow down is enough to crater equity prices.
It's tough for me to figure out what they're trying to say. Or trying not to say.We're at a .8% spread now. And it's tightening? Are we at the "hold on to your hats" point? or at the "Liquidate now, the big sale is coming" point? Or are we still sitting on the lift enjoying the scenery on our climb to the top ?--Paul - who is really digging the holistic approach to investing which everyone here seems to take. So refreshing!
"I am reminded of Buffett's ? remark that he was glad so many people were convinced that beating indices is impossible, it's easier to win when the others are not even trying"To think timing the market doesn't work doesn't mean you don't think you can beat the indices.The vast amount of investing going on in the market is short term thinking. I think this provides a natural advantage to long term investors, who can evaluate companies and buy good businesses according to their growth or value perspectives.I think there are 2 problems with timing. The first is that it is really hard to get it right. The market waits until everyone who thought a bear market is coming, finally gives up, before it actually goes off a cliff :)I think the second is that timing is where the individual investor has a real disadvantage against professionals. Professionals can get information and buy tools that help them get an advantage in timing - we can't beat them. But understanding an underlying business is a bit more democratic - most of the info is public, and so is a lot of analysis - or at least cheap enough to afford, like the Fool.So I would say that just because I don't think I can successfully time the market doesn't mean I think I can't beat the indices - in fact with the help of the Fool, I have been doing so for a long time.Now saying that, it doesn't mean I can hedge my bets when the weather looks cloudy. I have lots of cash on hand right now, am writing covered calls on positions I think have overgrown themselves a bit. I really like your comment: "If buying more than one stock is tactical diversification, doing timing with some of your investing is strategic diversification", if by timing you mean, keep cash on hand
Here is an interesting article on the yield curve:The threat of such an inversion has even caught the attention of Federal Reserve officials, with St. Louis Fed President James Bullard saying that If the Fed goes ahead and raises rates and the 10-year rate “does not cooperate,” the yield curve could invert later this year or in 2019.However, not everyone is freaking out about that possibility.Andrew Adams, analyst at Raymond James, in a Friday research note argues that not every narrowing yield spread between the 2s and 10s results in an inversion and that some of the best stock-market performance has come amid such flattening yield trends:https://www.marketwatch.com/story/the-stock-market-is-freaki...
we can't beat them don't know about that "we" .Some people on this board have been beating the the indices and most funds for many years. Bu later you say you can ,so I am not sure what you mean . Due to institutional restraints , simple B&H of S&P 500 ETF beats most mutual funds over the long run and outperforms the "average" investor 2 to 1 or better.And it's not in your post but I have heard others say "you can't time the market" over and over. By that they mean they can't , thus nobody else can. Much the same as me saying since it takes me 12 minutes to run a mile nobody can possibly do it in 4 or 5 minutes. Over on the MI board there are multiple systems that beat B&H. Usually only by a few percentage points but with less downside volatility. If you want a really simple one, look at a 45 week simple moving average of the SP500. Timing tops is hardest to do, so don't expect too much here. I did reduce stock positions last yield curve inversion and it worked for me. Timing spike bottoms in bear markets is the most productive but that seems a long way off at this point. Nothing is foolproof but few things in life are. I am happy if it just shifts the odds a little in my favor. I am always willing to bet more when I am the Las Vegas casino, not the Las Vegas customer.To answer a question from somebody else, yield curve inversion is inversion, not flattening. You could use flattening, as I will do with unemployment . But you must pre define "flattening" based on available data ,not your gut feeling at the time. My gut is very unreliable except telling me when it is suppertime. And I had a dog that did that ,never missing by more than a half hour, no matter the weather or time of year.Re timing, I use cash, but tech investors could try switching temporarily to low beta stocks. Me I like as few decisions as possible.
flattening yield trends to repeat, flattening is not inversion.The longer the inversion lasts and the steeper it is, the less the incentive for bankers and others to loan money. And that is for both business and individuals
found a source of international yield curves https://www.bondsupermart.com/main/market-info/yield-curves-... I have no hard data on this but the global economy suggests that yield curves in several different countries might follow each other. From the Federal Reserve paper I quoted earlier A negative term spread was always followed by an economic slowdown Always is a strong term especially in investing.The yield curve is not inverted today. . In any of those countries. In the US it is a bit steeper that was a month ago.If you want to call it "Flattened" you must have a definition of "flattened" first, then see how your definition fits the data.I have no idea whether this flattening will be followed by an inversion . I do suspect that even those academicians at the Fed, even following flawed rules made by long dead white guys, using flawed data , really think that inflation is bad enough for them to cause a recession to stop it. But I can't be sure, they have made a long series of dumb mistakes in the past.
possibly everybody here is bored with yield curve but one more post https://www.marketwatch.com/Story/the-stock-market-is-freaki...It is true that all recessions since 1960 have been preceded by an inverted yield curve (commonly defined these days as when the 2-Year U.S. Treasury yields more than the 10-Year U.S. Treasury), but the problem is that too many people have recently been expanding this relationship to a flattening yield curve as well. Yes, the yield curve has been flattening—the spread between the 10-Year and 2-Year has narrowed from ~130 basis points at the beginning of 2017 to 48 basis points now—but crossing the inversion point is far from imminent. A yield curve as flat as it is now does not always lead to an inverted yield curve and even if it does, the lag time can be years before it occurs. What’s more, some of the best stock market returns in history have come after the yield curve became flatter than it is now, including after 1984, 1988, 1994, and 2005 (see chart 2 on page 2; arrows in lower S&P 500 panel represent when the 10-2 spread first became as narrow as it is currently). In fact, the 10-2 spread was relatively flat for the entirety of the 1994-2000 period, the greatest stock market run in history. So, are we worried about the yield curve signaling a possible recession is on the way? No, not at this stage. *********** on earningsLindsey Bell, investment strategist at CFRA, told MarketWatch that nearly 80% of the companies that have reported so far have beaten earning estimates, while about four out six companies have outperform on sales. “Much better than historical standards of 66% and 55%, respectively,”
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