Why'd neplus' comment below get killed? It's a bit jargon-y, but a decent analysis of the macro landscape at the moment.
Yield Curves Invert in U.S., U.K
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Re: Yield Curves Invert in U.S., U.K
#52Market conditions have changed to the point where the yield curve is likely irrelevant, and markets will continue to moon indefinitely.
What specifically has changed?
I'm not the OP, but if the Fed decides that the stock market isn't going to fall, then come hell or high inflation it's not going to fall. Some people think that the recent history of interventionist monetary policy (QE) points to a Fed that is willing to pump up asset prices in the event of trouble. Does that mean the economy won't fall apart? No, but it does mean that holding cash could be a worse idea than holding equities.
Re: Yield Curves Invert in U.S., U.K
#53Still baffled that this is called a curve
Re: Yield Curves Invert in U.S., U.K
#54It's a self fulfilling prophesy to an extent because all it takes to cause a recession is to convince everyone there's a recession.
Human society is a self fulfilling prophecy. It is an ocean of slow moving mob mentalities, crashing against each other.
Re: Yield Curves Invert in U.S., U.K
#55Earlier quoted context omitted.
It’s about diversification and timing the market not simply holding cash for 10 years. I also just sold some stock, but I am still 75% in stocks.
Warren Buffet made the same bet, S&P 500 vs some hedge funds. From 2007 to 2017 S&P gained 7.1% vs 2.2% for the hedge funds. The hedge funds arguably know more than you.
The hedge fund must have been doing a different strategy as I did much better than 7.1% from 2007 to 2017. Left at 1500 got back in at 930 and then ignored the market for 10 years.
Re: Yield Curves Invert in U.S., U.K
#56Re: Yield Curves Invert in U.S., U.K
#57Earlier quoted context omitted.
not impossible, but very unlikely for a layman. it's like trying to win a 1v1 against an NBA player.
Depends on what you mean by timing the market. Several strategies like keeping a fixed ratio of stocks to bond are effectively timing the market. You pull money out of stocks when they go up, and put money into them when they go down. Personally, I am less interested in absolutely maximizing my returns as I am maximizing the likelihood of reaching a return threshold.
Timing the market is exactly what you said about saving cash. Changing your asset allocations based on age or other milestones is not timing the market in any way. It’s reducing risk if you are about to retire.
Changing your asset allocation yearly or quarterly based on news is foolish. I’d call that timing too.
Re: Yield Curves Invert in U.S., U.K
#58I'm surprised that everyone blindly cites the inverted yield curve as a recession indicator without considering the "why". Seriously, if you were to ask ten people why an inverted curve predicts recession, you'd get ten completely different answers.
I personally don't think this is necessarily the inversion that is going to be predictive of a recession because the inversion is occurring at the long end (the 10/30 years spiking as opposed to the 3 month/2 year selling off). I think the short end is far more important than the long end because the short end tells you about monetary conditions in the economy. If the short end yields start moving up, that means that it's going to become more expensive to borrow money so spending and capex contracts, which is what can bring on a recession. Even that depends on the degree to which monetary conditions deteriorate.
Why are long bonds spiking? Because other central banks around the world are even more dovish than the US Fed, so money that is looking for long-term safe haven investments is coming aggressively into US long bonds.
Take a look at three month commercial paper rates, which are actually in a major downtrend (not surprising given Fed policy): https://ycharts.com/indicators/3_month_aa_financial_commerci...
Three month commercial paper rates represent the cost at which businesses are currently borrowing for short-term expenses on the open market. That cost is going down, too. I take that to mean monetary conditions are very good in the sense that there is no shortage of money floating around the economy looking for a return. Without some major fundamental change in economic conditions I don't see how equities can be expected to drop a whole lot from here. I think this is a blow off the top for rates that is going to be short-lived, especially if other central banks start tightening policy which nobody seems to consider a possibility. But if inflation starts creeping up, then they will likely start raising rates or keeping them where they are. Ironically, when central banks raise rates that is usually an extremely bearish indicator. It's a bit puzzling to me that everyone seems convinced that lower rates are bearish.
Also, I can't think of a time when literally everyone focused on a single indicator at the same time, used said indicator as a predictive tool, and were proven correct. That's just not how markets work. People get scared and excited at the worst times tactically.
Re: Yield Curves Invert in U.S., U.K
#59Earlier quoted context omitted.
That's partly because the market boom is itself a self-fulfilling prophecy. Stock markets go up because other people think they're going up. People who buy securities for the purpose of re-selling, rather than holding, bid prices up, based not on fundamental valuation but on the thought that it will become more popular. Stock markets aren't the same as the economy as a whole, but stock market bubbles boost the econom…
> That's partly because the market boom is itself a self-fulfilling prophecy. Stock markets go up because other people think they're going up. I'm really curious how the index funds will behave in the upcoming recession, afaik that was one of their main mantras and selling points, so to speak, i.e. that the market only goes up (or a certain part of the market, the most important part of the market) and that you'd be…
Index funds will do exactly as well as the aggregate of the individual stocks that they track (whether equities, bonds, treasuries, real estate, metals or something else.)
The selling point is that investing (as opposed to trading) is a long-term method of increasing wealth. And, historically over any reasonably long period of time, broad index funds grow (between dividends and selling price) more than inflation, and do so without requiring the individual investor to "bet right" on individual companies, or to time when they buy and sell.
Of course, some people panic when index funds see massive drops (which are often much worse than 20%) and sell when the price is much lower. They lock in the losses thinking they can perfectly time the "low point" and buy back in at just the right moment. (A few are right. Most are not!)
Investing does include personal tolerances for risk, an ability to be patient, etc so you have to figure that out for yourself. But the most successful investment plans are a combination of diversification and sticking to your plan through the bad times as well as the good.
You shouldn't be reacting to the market (as a long-term investor.) You should have a solid plan in place. If you have a firm asset allocation of 80% stocks and 20% bonds with a line item in your investment policy statement that says "Re-balance when there is 5% or greater drift" then you wait until you cross that drift threshold, sell and buy what you need to get back to your target asset allocation, and you go on with your daily life.
Re: Yield Curves Invert in U.S., U.K
#60Earlier quoted context omitted.
That's partly because the market boom is itself a self-fulfilling prophecy. Stock markets go up because other people think they're going up. People who buy securities for the purpose of re-selling, rather than holding, bid prices up, based not on fundamental valuation but on the thought that it will become more popular. Stock markets aren't the same as the economy as a whole, but stock market bubbles boost the econom…
> That's partly because the market boom is itself a self-fulfilling prophecy. Stock markets go up because other people think they're going up. I'm really curious how the index funds will behave in the upcoming recession, afaik that was one of their main mantras and selling points, so to speak, i.e. that the market only goes up (or a certain part of the market, the most important part of the market) and that you'd be…
We've already seen this in 2008. The funds will go down, then once the recession passes will return to normal. Long term holders have little to fear.