Hoping everyone had a wonderful long weekend!
As summer winds down and life returns to normal, you will find that very little changed last month when you open your investment statements. August was anything but boring however, as markets bounced up and down on recession fears, ongoing trade disputes and outrageous presidential tweets…
The ‘R’ (recession) word surged in popularity in August, with the ‘Google Trends’ chart below showing the searches for the term reached levels not seen since 2008!
The uptick in recession chatter was mainly due to an ‘inversion’ in the yield curve in early August between 2-year bonds and 10-year bonds. Simply speaking, an inversion occurs when investors receive a higher interest rate for buying shorter-term (2-year US Govt. bonds), rather than for buying longer-term (10-year Govt. bonds). Past such ‘inversions’ have been a very good predictor that a recession is around the corner. Our chief economist Stefane Marion sees things differently however – putting the probability of a recession in the next 2 years at just 33%.
Stefane and his team believe that the unprecedented involvement by the US Federal Reserve in the bond market has distorted the yield curve and thus rendered its predictive power – unreliable. Other predictive indicators such as consumer confidence and employment remain positive for the economy.
Markets in late August seemed to agree with Stefane and his team – as stock prices climbed in the final week of the month and recession fears cooled. For our managed accounts - our view hasn’t changed. We prefer to remain ‘safe’ rather than ‘sorry’ and are holding upwards of 20% in cash and short-term bonds. While still participating in equity upside, this larger cash position enables us to have some money to spend should things take an unexpected turn.
Wishing you all a happy September!
-The Creed Team