I can almost feel all of the "investors", both professional and individual, who have been outside with the birds looking in during this latest stock market move, using this chart above to mentally justify their lack of results. The chart above relatively mirrors the length of time I've been professionally managing money. So I've seen some really good times and some not-so-good times.
Just to back up for a minute, the slope of the yield curve provides a good insight as to the US economy. During times when the yield curve is flat or worse, negative, you can be assured that economic weakness is present or just around the corner. Keep in mind this is just one view, but it is a pretty good gauge. A second point to keep in mind is that humans are terrible at making investment decisions. There has been great research as to why this is, but the biggest hindrance is, most likely, the human brain's willingness to extrapolate the most recent past out into the future.
With that as a back-drop, let's again look at the graph above. Just looking at the slope of the yield curve, it does in fact appear to be flattening. If you were to look at the direction of the spread, it does appear to moving to the zero (blue) line. It makes for a really nice story to spin a narrative of the pending recession and doom for the US stock market when referencing this chart. However, one does not have to go too far back in time to see where this "analysis" is really faulty. I've marked a couple of blue arrows to highlight one of the greatest bull markets in history. The yield curve was pretty flat and even was negative for a short period of time in 1998. The small blue box is the period of time when the NASDAQ doubled in price. Many stocks went up hundreds of percent from Fall of 1999 to Spring of 2000. If it were me, I'd spend more of my energy looking for causality or driver of stock returns. (Hint: it's not the slope of the yield curve)
The point of this whole post is that predicting what is going to happen is really hard. Another point before I wrap this up, is even if i could predict with great precision what fundamentally the economy or a specific company will do in the future, I will never be able to predict how individuals will interpret and react to that data. It is such as waste of time. There is no financial edge in story telling. Well, unless your a financial sales person! The process of making market decisions should be multiple steps. This analysis should be well researched and vetted. One should spend more time trying to disprove a thesis, than find data to support the concept. But most importantly, when the facts change, you need to change too. Watch price. It reveals the truth little by little.
Cheers,
P. Franklin, Jr.
December, 5th 2017
All opinions and estimates included in this communication constitute the author’s judgment as of the date of this report and are subject to change without notice. This communication is for informational purposes only. It is not intended as an offer or solicitation with respect to the purchase or sale of any security. This information is subject to change at any time, based on market and other conditions. Any forward looking statements are just opinions – not a statement of fact.
Investing may involve risk including loss of principal. Investment returns, particularly over shorter time periods are highly dependent on trends in the various investment markets. Past performance does not guarantee future results.