A quick check: Does everyone remember what we said about an inverted yield curve? The short version is that treasuries are generally supposed to generate more yield as their maturities stretch out over time. When short-term treasuries are yielding more than long term treasuries (i.e. – an inverted yield curve), it implies fear on behalf of investors who fear an imminent break in the economy.
The yield curve was inverted in September but has steadily recovered to a normal state over the past few months. Moreover, the S&P 500 has made it through five consecutive weeks of gains with no material volatility. The employment picture is about as good as it can be. Despite the slowdown, the changes in the tax laws have kept profits steady through the pullback in easy growth. Despite all the good feelings and confidence, The Federal Reserve cut key interest rates three times, making credit cheap and easy. Threat catalysts – a hard Brexit, a change in Chinese trade, a run on US debt – have all been pushed off to some later date. That’s a problem for future people, but today is going great!
To summarize, there is no fear in the marketplace. There is only confidence and easy-going complacency, as if nothing is going wrong and nothing ever could. All necessities provided and all anxieties tranquilized.
So, our question for you, does a world filled with carefree, unchallenged investors give you confidence or is it worth having a healthy dose of skepticism, especially in the short term, to challenge the shared vision? Long-term strategic investors can afford to appreciate the unrealized gains while accepting inevitable downturns graciously.