Broker Check

This Yield Curve Doesn’t Predict a Bleak Future

| November 10, 2019
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The marginal yield curve inversion has made a lot of news this year because of its supposed ability to predict recessions on several prior occasions.

If history repeats itself, there’s already a countdown on when our economic expansion will end, right?

Well, in our opinion we can’t look at this in a vacuum. If there is a China trade deal, a lot of global economic uncertainty will be removed and a recession in the immediate future would be less likely.

Unrivaled Circumstances

To be fair, we think the recent minor yield inversions aren’t a predictor of a recession. The reason is we’ve never had an inverted yield curve when major government bonds (Europe and Japan) traded at negative yields.

It’s possible our own minor inversions are the result of extreme monetary policies in Europe and Japan, and really have nothing to do with us. If that’s that case, these curve inversions have no future-looking value this time around.

Those extreme monetary policies are a result of local economies and government bonds not performing. It’s their poor performance and central banks forcing our curve to invert, and not the performance of the U.S. economy.

Sometimes it’s Substance over Statistics

This is why we at Cornerstone spend more time talking about actual economic events, like trade negotiations with other countries (there are many ongoing negotiations), rather than wholeheartedly believing technical indicators. Economic events are more predictive of economic outcomes because they have a direct influence on business activity.

As these many trade deals take effect, the U.S. economy could reaccelerate in 2020. And that’s true even if the yield curve remains inverted.

If that’s the case, this curve could be like 1995-98, when curve inversions preceded economic expansions. Perhaps this curve is predictive then, but not of what most people think.

Securities sold through CoreCap Investments, Inc., a registered broker-dealer and member FINRA/SIPC; advisory services offered by CoreCap Advisors, Inc., a registered investment advisor. Cornerstone Financial and CoreCap are separate and unaffiliated entities.

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