July 26th, 2022
As the markets await the Federal Reserves decision today on whether to make a 3/4 point increase in short term interest rates, to contain inflation, or something more significant, like a full 1% increase, investors should consider this question. Are we facing a recession in the coming months?
One technical indicator that has a good record for forecasting coming recessions is an inverted yield curve. A “normal” yield curve shows increasing interest rates over time. That is the 10 year yield is greater than the 5 year yield which in turn is greater than the 2 year yield for U.S. Treasury Bonds.
At present we have a flat yield curve, where the returns are about the same for these different bond maturities. However, the very short term, the 3 month Treasury Bill yield, is getting higher than the yield on Treasury Bills with longer maturities. In the past, that has forecasted a slowing economy, and a possible business recession.
Another warning sign is the recent reports from both AT&T and Verizon, that they are starting to see increased delays in customer monthly bill payments. When people are having problems staying current on their cellphone bills it can be an early warning sign of stress on consumer spending patterns.
A possible related news item for concern, is that reports are appearing in the media, that a growing number of Chinese residents are refusing to make monthly mortgage payments for their unfinished apartments. If economic problems are growing in China, the world’s second largest economy, that is not good news for the economies of the rest of the world.
Although nothing is for certain in these unsettled times, these are several reasons for people to approach markets with a great deal of caution, in the coming weeks.
We continue to monitor the price of Bitcoin which seems to be weakening the past few days, after a signifcant rally the past two weeks. There seems to be a relationship between the price of growth stocks and the price of Bitcoin. Both asset classes seem to move up and down at the same time. Both reached peaks about 6 months ago. Does weakness in Bitcoin, indicate coming weakness in growth stocks?
Of course, remember that Wall Street, is a “two-way” street and that the central banks of the world are well known to step into stressfull situations and cause sharp, painful, short covering rallies in the face of bad news.
All of the above is Not investment advice, just food for thought.