What I Care About This Week | 2022 Nov 21

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Photo by Johannes Plenio on Pexels.com

by Franklin J. Parker, CFA

The Summary

  • The Bottom Line. After an initial bounce, markets have faded just a bit with questions about whether the Fed will acknowledge the lower-than-expected inflation data. Hawkishness seems to pervade, and Powell has repeatedly said that he would rather over do it than under. By my read of the economic data, there is a storm brewing on the horizon, but the economy has yet to enter a dangerous recession. Caution is warranted, but it appears pessimism is dominating, which may offer some opportunities.

  • OPEC is considering increasing their oil production significantly, sending oil prices lower. This would alleviate a lot of pain in prices, both in the US and especially in Europe. Lowered energy costs also gives consumers a bit of a boost, and just in time for the Christmas shopping season. Moreover, lower energy prices should help push down inflation figures, adding some fuel to the “central banks can slow down” narrative.

  • Expect a light trading week this week, and a return to business with reports on Black Friday shopping and retailers taking the spotlight next week. This week, durable goods orders will post and global manufacturing PMIs. Both will be watched, but they are unlikely to move markets much.

The Details & Chart of the Week

One of the most reliable indicators of a pending recession is the yield curve.

I specifically look at the difference between yields on 10-year US Treasury bonds and 3-month US Treasury bonds. In a normal environment, you get paid more to tie up your money for 10-years than you do for 3-months, but leading into a recession that relationship inverts. This week’s chart plots the difference between the two.

As you can see, over the past week, the yield curve has inverted and inverted quite strongly. When coupled with everything else, this is a signal that a recession may be beginning to develop.

However, a careful observer will note that it is not the inversion per se that signals the recession. Rather, it is the recovery from that inversion that signals a recession is imminent. In past recessions, the curve reverts about 3 to 10 months prior to the official start of the recession, meaning we have some time to sit and wait.

The point is: caution is warranted, but the current level of pessimism may be overdone.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

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