The wall of worry for investors include the U.S.-China trade wars, slowing global growth and inverted yield curves. This is enough for Campbell Harvey, a professor of finance at the Fuqua School of Business at Duke University, to issue a recession code red for the economy.
“I have gone on the record to issue a recession code red,” said Harvey. “Growth will slow according to my model.”
For Harvey, it’s the inverted yield curve that is flashing the brightest recession signal at the moment. This has been a prime cause for investors selling off in U.S. equities and stashing their capital into bonds—a shift that is causing safe haven government debt yields to plummet.
Per a report by Fortune, “Indeed the spread between the 10-year and the 3-month has sustained its inversion almost perfectly for exactly a quarter—minus one singular bright spot in late July when the yields of the two treasuries dallied at around the same levels. One of the initial curves that Harvey examined, the 5-year to the 3-month, has been inverted since February. And in what seems like confirmation of the fact, the 10-year and 2 year, which has also predicted past recessions, also has turned red in August.”
Furthermore, per the report, “Harvey notes that indicators such as GDP, unemployment rates, and the stock market are all lagging indicators—they give a snapshot of what is happening over the past quarter or now, for example. Instead, he points to a recent Chief Financial Officer survey conducted by Duke, in which 67% of CFOs said they expect a recession in late 2020. These surveys, says Harvey, can indicate how key decision makers plan to spend their money in the future.”
Nonetheless, the inverted yield curve doesn’t mean that a recession will happen immediately after the actual inversion. An actual recession will take between 12 to18 months to actually materialize after an inverted yield curve takes place.
“This does not look like an economy that is rolling over. Nor is it,” wrote David R. Kotok, CIO of Cumberland Advisors in a recent note. “Economic slowdowns are far from synchronous with inversions. Growth continued for a year and a half after the yield curve inverted in 2006.”
Professor Harvey did say mention that an inverted yield curve is not something that automatically signals a recession is inevitable. Still, it would be wise for investors to be more defensive in today’s market landscape.
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