Investment yield curve

BY FAZAAD BACCHUS

What’s in store this year for investors? This is a good question. This has been the longest running bull market, meaning a gain market in the last thirty years. The environment has been accustomed to a seven year cycle and it was expected that we should have seen a recession somewhere about 2015. Well 2015 has come and gone and if you are like most investors, you are probably wondering when the next recession will be, especially if you think it’s overdue. Clients are wondering and watching in both hope and fear. Advisors and financial professionals are also watching but with a different sets of metrics.

One of the number one way professionals look at the market indicator is through a measurement called the yield curve. A yield curve is a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of future interest rate changes and economic activity. There are three main types of yield curve shapes: normal (upward sloping curve), inverted (downward sloping curve) and flat.

A normal or upward yield curve indicates that there is an expected period of expansion. When investors see the curve as being normal, they are encouraged to invest as there is expected growth in the economy. When the curve is flat, it may represent either moving from an upward to a flat or a negative to a flat. When moving from an upward position, this yield curve tends to worry professionals as it is indicating a flattening of market expectations, it may revert to an upward slope or could move negative.

The fear is always when the yield curve moves to a negative position. When this happens, more often than not it signals that a recession is forthcoming. Portfolio managers tend to look at this curve and begin analysis to see when the recession might actually hit, which could be as early as six months from the inversion. All the same, they do look for other factors like housing starts, unemployment etc, to be able to come to a prediction.

Currently the yield curve is positive, housing starts are still high, and unemployment is still low. This means that there is no sign of a recession. However, no sign does not mean impossible, it just means that all the fundamentals for a good market are still in front of us.

So as an investor, what direction should you take? Well each investor can tolerate a certain amount of risk, but no investor wants a loss. A loss happens when you close off your account, a common mistake when markets are down. If you are uncertain about the markets, you can ask you advisor to assess the amount of risk in your portfolio and de-risk, meaning lowering your risk. Perhaps you may consider adding more bonds in your portfolio or simply reduce your equity position.

At the end of the day, staying invested is usually better for you.