https://www.marketwatch.com/story/w...ng-yield-curvefor-now-2018-03-27?link=sfmw_tw Ryan Detrick, senior market strategist at LPL Financial, looked at the previous five recessions and found that it took nearly a year for the curve to invert once it hit 50 basis points, though the stretch ranged from just under a month to 4 1/2 years. “Once it inverted, it took about 20 more months until a recession started. All along the way, the S&P 500 posted a median return of 21.5% over those 32 months,” Detrick said, in a note (see table below). " In other words, a flattening or inverted yield curve doesn’t mean a recession will start tomorrow, according to Detrick. Meanwhile, the stock market return in the final years of the bull market tend to be the strongest."
Powell talked about the curve inversion in his latest post-FOMC press conference https://seekingalpha.com/article/4158255-fed-chair-questions-value-yield-curve-recession-forecasts
Good article. Yield curve inversions for market timing seems quite overrated. Powel is raising one of their flaws, that it can just downright fail to predict a recession because not all yield curve inversions are the same (10% short-term rates with long term rates at 7% and 8% inflation are one thing, 3% fed funds with 2.5% long-term rates with 2.5% inflation are another) But even if they somehow were super predictive, then you got the issue of timing. It takes an avg/median of roughly 20 months from inversion to recession, in the meantime stocks will be rising. Lets say they are up by 12% on avg from one point to another (the article I showed does not provide the figure).This seems a resonable return for a 20 month time frame from historical data. Then the recession hits and markets drop about 20-30%. So the market timer had to miss out on 12% of gains in order to avoid a 25% drop, his net 'gain' (amount of losses he avoided) was 16 points (112 - 25% = 84 | 100 - 84 = 16). But that would also trigger taxes+transaction costs. Factoring that in, maybe the net valued added was around 10%. But it gets worse because that assumed the market timer got the exact bottom, which he most likely won't. And if the market bottom out at -20% but he expected -25% (or -21% for that matter), the market might just started soaring without him, what does he do, buys or waits out for a bottom retest? Or maybe new lows? But it gets even worse because it assumes the signal will ALWAYS work, which it wont. Sometimes it will fail (happened twice, using 3mTbill and 10yNote according to the Cleveland Fed and I'm sure it will happen at some point with 2ynote 10y note data, its a 5 sample size "research evidence" after all. A 5 sample size in a extremistan data set is not much evidence of anything) and when it fails, it will fail exponentially. That is, the market will continue to go higher exponentially for quite some time and the market timer will be scratching his head wondering when to get back in. The problem of the failure of the signal is a significant, if yield curve inversions lead to recessions and recessions lead to market dips which are great buys, what happens when the yield curve inverts and there is no recession? When do you get back in? When the yield curve 'disinverts'? How much higher will be the stock market be by the time the yield curve disinvert? I suspect it will be quite a bit higher, perhaps 10-20%, but it could be 30-50%. Stock markets are unbounded on the upside and exponential in nature. All of that should go into the equation of the market timer In sum, bailing out of stocks because the yield curve inverted is quite likely to be on average a bad decision. Bailing out when the curve is very flat and it MIGHT invert (like David Rosenberg seems to be suggesting his readers do) is just downright silly. Its not a surprise the David makes his money off writing and not by taking risk. Real risk takers get punished by markets quite quickly and learn that more robust forms of investing/trading are necessary
Warren Buffett's method is to just hold stocks no matter what and give up on timing. That's his version of HODLing. I'm not very comfortable with that approach because it leads to a lot of pain and big drawdowns. But I do think there might be some ways of decreasing drawdowns in recessions, but they will not involved having faith in yield curve inversions. Yield curve inversions might be ONE of the inputs but it will probably not be a significant one
It might be worth mentioning that Buffett's long term strategy and enormous asset base make it difficult to be very nimble. Selling a large, long term position and paying the tax means Berkshire would need a break of at least 10-15% in the price just to offset the tax hit, and that assumes pretty perfect timing on the sale and re-entry. His method of market timing is to allow excess cash balances to accumulate when valuations are unappealing. It appears we are in one of those periods currently with cash on hand at BRK equal to roughly 25% of the market cap.
$SPOT IPO opened at $165ish and now its trading at $152 and it might go lower. Just total dump by insiders, as called here in this journal. I got my borrows and managed to short at $163. Not a big position or anything but free money I will take it everytime
Its funny, almost every good/great stock investor bases their decisions looking at projected earnings/cashflows/revenues (even if they use the past as a guide to the future), etc but somehow a lot of people value the S&P500 based on past earnings/cashflows/revenues but dont think much about the future (CAPE cultitsts) and they think its normal to do that. When someone talks about the CAPE ratio, the majority of the time they are not equity people (Assness, Shiller, Gundlach). Most compentent equity people are far more interested in the future rather than the past
The US imports $500B a year from China, China imports about $130B a year from the US. Trump is playing a game of poker with China but he has a lot more chips to play with. China cant keep matching tarrifs because they simply dont have the numbers to keep going, meanwhile they will disrupt their supplies