Good afternoon to all. Brent Chavez with Aequitas Equitas Investment Group. I hope this finds you all doing well. I just want to get a video out to kind of give you a little bit of a breakdown of what’s been going on here for a little over a week now with the volatility in the markets and some real ugly days, just to be frank.
Well, first of all, we’ve seen some increased tension in the trade war between the United States and China. Also, we’re looking at a Brexit that may not go as smoothly as thought to happen. Again, Brexit is where the United Kingdom withdrawals out of the European Union and goes back to being on their own. And also we had the protest in Hong Kong. Then we have the biggie, the inversion of the 10 and 2 year the yield curve. We’re going to take a quick look at that.
So, this is the 10 and 2 year yield curve – what the 10 year and 2 year yields on a yearly basis. We see the green is the 2 year, the blue is the 10 year. So we see the green, and this is just today, it was a little bit more pronounced earlier in the week where the green was above the blue, so the 2 year yield was higher than the 10 year – that is considered, generally speaking, to be an indicator of a potential recession. So let’s deal with this issue first.
We’re going to take a look at what’s going on in the world as far as yields are concerned. We see a lot of negative yields of sovereign debt. Again, if you get Switzerland, money, a thousand dollars… 10 years later, you’re going to get 1.12% less back. So you’re going to pay Switzerland to hold your money. Like likewise, in Germany, right now, the Netherlands and France, in Japan, just to name a few. Again, you’re going to buy their 10 year Treasury, 30 year Treasury, whatever they’re offering, and they’re going to pay you less back over that 10 or 30 year period.
So, some people feel that these negative rates throughout the world are putting pressure on our… if we go back to that 10 to 2 year chart… we see some people feel that this is being artificially pushed to an inversion. In the past, several of the Federal Reserve Chairman, Alan Greenspan and Ben Bernanke, really preached that theory. And it led to a recession both times because they continued in the 90s with Greenspan to raise rates in light of this. Then Ben Bernanke did it in 2005, we had a yield curve and he continued to raise rates into an inverted yield curve. In both instances, we saw major recessions take place. In fact, the last seven recessions had been caused by tightening of the Federal Reserve making money, contracting the money and making it more difficult for people, businesses and individuals to get loans. So that is a potential scenario that has everybody scared – but, even in this case, where we see an inversion, historically speaking, it’s a few years down the road before we’re actually in the middle of the recession.
This comes from a gentleman by the name of Mark Haefele, he is a Chief Investment Officer at UBS. He said this about the yield curve and inversion, “in which 10-year Treasury yields fell below 2-year ones – may not be the inevitable herald of a recession that many fear, especially if the Federal Reserve meets expectations by cutting short rates to restore the curve’s normal upward slope.” Then he further went on to say, “Neither does a yield curve inversion indicate it is time to sell equities.” He said in a blog post, “Since 1975, after an inversion in the 2-year/10-year yield curve, the S&P 500 has continued to rally for nearly two years, and has risen by 40% on average until hitting a bull market peak.” So again, even when we see this, it’s not like we’re going to, historically speaking, be in a recession next month as the stock market is reacting like we will be.
So, that’s some interesting things to think about. But again, if the Federal Reserve is sensitive to this indicator and what it has led to in the last two major recessions in our country, they will lower those short term rates and get this yield curve back to its normal slope.
Also, a gentleman by the name of Tony Dwyer, he is a Chief Market Strategist a Macroeconomist with Canaccord Genuity, had this to say about the situation that we have here in our economy, he says about his projections moving forward, he says, “Although we continue to believe more time is needed to complete the current correction, our still-positive core fundamental thesis continues to suggest any weakness should prove limited and temporary and provide a more attractive entry point for a move toward our 2020 target of 3,350 [on the S&P 500].” So, the S&P 500 today is sitting at 2826, at the time of our video. Again, he’s projecting a target of 3350 for next year.