eResearch | There has been much debate as to whether or not the U.S. is heading towards an economic recession. There are all sorts of warning signs, but there is no certainty.
An inverted yield curve is the strongest indicator that a recession is probable. Over the past 50 years, every time that the yield curve inverted, a recession occurred an average of 15 to 20 months later.
In Canada, the major yield curve metrics have been inverted for some time. As of August 8, eResearch initiated its Count-Down to an Economic Recession in Canada with November 2020 to April 2021 fitting the time-frame described above.
In the U.S., although many of the yield curve metrics are inverted, our criterion to begin the Count-Down has not been triggered. We think that day is coming soon. However, on Thursday last week, yields spurted upwards, particularly at the long-end, then tailed off slightly on Friday. Nevertheless, of 24 different yield curve ratios that we follow, 15 of them are inverted. However, our key yield curve metrics remain just above the inversion benchmark. So, based solely on yield curve ratio analysis, the jury is still out as to whether or not an Economic Recession will occur in the U.S.
The possibility of an Economic Recession becoming a reality has obvious implications for investment portfolios. How best to position the equity portion of one’s investment portfolio can be considered along-side historical guidelines. These are depicted in the graphic below.
Generally, when the economy is contracting, the better equity sectors to own are Consumer Staples, Utilities, Financials, Real Estate, and Health-Care.
If the economy is expanding, then higher weightings in Consumer Discretionary, Materials, Industrials, Energy, and Technology are warranted.
If the economy is marking time, then some form of combination seems in order, with a conscious monitoring of economic trends.
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