This Recession Signal Could Set Up Trade for Value

As Treasury yields fall to new lows, an inverted yield curve, which can indicate that a recession could be forthcoming, is reentering the current financial vernacular once again and sparking fears in the bond markets. This, in turn, could spark a move into more value-oriented equities in addition to the safety of government bonds.

“For over 50 years, the yield curve inversion has predicted every U.S. recession,” wrote Rob Otman in Investment U. “And the chart below shows the last three times it’s happened. The blue line shows the 10-year interest rate minus 3-month rate since 1985…”

“Each time 10-year interest rates have dropped below 3-month rates, a recession has followed,” Otman wrote. “Recessions are marked by the grey shading. And on average, a recession starts roughly a year and a half after it dips into negative territory.”

As a result, this sparks a move towards safe haven assets like bonds and precious metals.

“When investors are uncertain about the economy, they gravitate towards safer investments,” Otman added. “And U.S. debt is one of the safest investments available – thanks to the power to tax. On top of this, the bull market has run long in the tooth. Stocks and other assets have become expensive. Investors are struggling to find better places to park their money. As a result, investors are more willing to lock into lower rates. And this increased demand for long-term treasuries has pushed down rates.”

Will a mass movement away from growth into more quality, safe investments be on the way? From a relative value ETF standpoint, this could put value over growth equities and defensive over cyclical equities in play—particularly, the  Direxion Russell 1000 Value Over Growth ETF (NYSEArca: RWVG) and the Direxion MSCI Defensives Over Cyclicals ETF (NYSEArca: RWDC).

RWVG seeks investment results that track the Russell 1000® Value/Growth 150/50 Net Spread Index. The fund, under normal circumstances, invests at least 80% of its net assets in securities that comprise the Long Component of the index or shares of ETFs on the Long Component of the index.

RWGV measures the performance of a portfolio that has 150% long exposure to the Russell 1000® Value Index (the “Long Component”) and 50% short exposure to the Russell 1000® Growth Index (the “Short Component”). On a monthly basis, the Index will rebalance such that the weight of the Long Component is equal to 150% and the weight of the Short Component is equal to 50% of the Index value.

RWDC provides a means to not only see defensive sectors perform well, but a way to capitalize on their outperformance compared to cyclical sectors. RWDC tilts towards defensive sectors like health care and consumer staples as shown in the fund’s breakdown. Conversely, it shorts names like the top technology giants that skew towards momentum.

For more relative market trends, visit our Relative Value Channel.