Monthly Insights - March 2019 thumbnail

Monthly Insights - March 2019

A lot has happened since last month’s commentary. The February employment report came in well below expectations (20,000 versus 180,000 new jobs). The Federal Reserve reacted by shifting course and announced a dovish stance on interest rates and monetary policy. Global manufacturing PMIs declined more than expected. And finally, the big change, the one worth noting above everything else, was a dramatic drop in long-term interest rates, leading to a very important inversion of the yield curve.

Of the six indicators on Allegiant’s Economic Dashboard, the 3-month to 10-year yield spread is arguably the most important. When long-term interest rates move below short-term interest rates it spells trouble for the economy moving forward. An inverted yield curve has been one of the great predictors of recessions, as no U.S. recession has occurred without an inverted yield curve.

What does a yield curve inversion indicate? To help answer this question the Allegiant Investment Research Team examined the previous seven recessions, going back to the 1960s. On average, the S&P 500 peaked four months following the yield curve inversion and a recession followed within 11 months of the inversion. These statistics are roughly in line with our current assessment that the economy is in the later innings of expansion. The inversion is an important sign that we need to pay more attention and prepare where we can. 

Although we most certainly should raise our awareness, it’s not time to panic yet. The yield curve inversion is significant, but the other important indicators on our Economic Dashboard have not yet crossed the point of no return, so our alarm bells are not yet going off. As a reminder, Allegiant is looking for three red indicators before feeling confident that a recession is on the horizon.

The current Economic Dashboard has one red indictor (yield curve) and one yellow indicator (year-over-year change in consumer confidence). The other yellow from last month, the S&P 500 versus its 20-month moving average, has once again turned green. Equity market performance over the last 3 months has been nothing short of remarkable, making back all the gains from the 4th quarter swoon. 

So, what does this mean? It means we must be extra vigilant with risk exposures in the portfolios. We must also prepare for cash needs over the coming years. As I wrote last year, it is an important time for you to speak with your Wealth Advisor about any need for a significant cash withdrawal on the horizon. 

If you know of major expenses coming up, but haven’t informed us about it, please let us know so we can prepare. Given the above, now is a great time to raise some cash. However, it does not necessarily mean that positive equity returns are over. Leading up to the 2007-2009 recession, the S&P 500 returned nearly 30% following the yield curve inversion before the market peaked. The same thing occurred in the late 70s. 

The Allegiant team is staying on top of the data and will communicate any major changes as they arise. Together we’ll design and update a plan to get you through the challenges that may arise. 

If you would like to see more data and charts about the economy and various financial markets, please view or download the entire Monthly Insights book below.

Benjamin W. Jones, CFP®, AIF®
President, Chief Investment Officer, Principal

  • Published: March 26, 2019
Monthly Insights - February 2019 thumbnail

Monthly Insights - February 2019

  • Published: March 04, 2019
Monthly Insights - January 2019 thumbnail

Monthly Insights - January 2019

  • Published: January 31, 2019