“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” – Warren Buffett
It was all quiet on the western front until yesterday. As a wealth adviser it can be a struggle to get in touch with your clients in late summer when markets have been roaring to double digit returns.
That all changed yesterday. Suddenly clients, friends, and folks I haven’t spoken to in years were calling, texting, and emailing. They were asking questions like:
“Are we heading for trouble? Should we be worried? What are you thinking? Is now a buying opportunity, etc., etc., etc.?”
Yesterday August 14th was the worst day for the markets in 2019 so far. There were massive selloffs in stocks mostly attributed to fear of oncoming recession in the US and globally. This fear was predominantly sparked from an inversion in the treasury yield curve.
What’s an Inverted Yield Curve?
An inverted yield curve is when the yield on a longer-term bond is lower than that of a shorter-term bond. In the case of yesterday, the 2-year treasury note had a higher yield than the 10-year note. Historically an inverted yield curve has predated recessions. (yield equals the return an investor should realize on a bond… longer-term treasury bonds should have higher interest rates and higher yields)
While inverted yield curves have always predated recessions, recessions haven’t always followed inverted yield curves. In some instances when recession did follow the inversion, it didn’t occur for over 2 years after. How predictive was that? That’s like me saying “I expect a recession to occur in the next 5 years.” It’s a pretty big strike zone.
The yield curve is a better economic indicator when comparing the 2-year note and 30-year bond or the 10-year note and the 30-year bond. Historically that has been significantly more predictive than the 2 vs 10-year. Economics is soft science not hard science, which means the data is always open to interpretation.
Investors need to be very careful not to fall into herd mentality. Following the herd will lead to trouble. The herd is rarely right when it comes to markets. The current headlines look like classic herd mentality to me. Suddenly it seems very vogue to be dour on the global economy and the markets.
There is something about human psychology that makes us want to give more credibility and deference to negative and gloomy people. However when it comes to the stocks, the always negative people are statistically wrong more than they are right, and they are wrong by a wider margin.
– Wyatt Swartz
– 8/15/2019