This yield curve is back to its worst level of inversion since summer. The 10-year Treasury yield minus the 3-month Treasury yield is back down to -1%, after the spike in long-term Treasury yields in October wreaked havoc on stock prices.
This is the longest and most stubborn yield curve inversion we've seen going back to the early '80s. Worse, inversions have a perfect track record as a prelude to recession within the next couple years.
That's at least partially why several investment banks (Amundi and Deutsche Bank in Europe, along with PIMCO stateside) and major market actors (the upper crust of moneymakers, Stanley Druckenmiller, Michael Burry, and Jeffrey Gundlach) are warning investors of a recession hitting, and soon.
The jobs report out Friday, though, throws some water on this. Unemployment actually fell to 3.7%, against expectations of a rise to 4%. We have the end of strikes in the auto industry and Hollywood to thank for this, in part.
No matter the cause, effect on markets is palpable. Traders' bets that the rate will stay the same by the end of March rose from 35% to 53%, according to the CME FedWatch tool.
Say it with me: "Higher for longer."
But whether it's recession or expansion… cuts or pauses… hard landing, soft landing, no landing, or anything in between… it really doesn't make much difference.
Come hell or high water, all you really need to do is buy great stocks in great companies and hold them for as long as it makes sense to.
Plenty of companies have thrived in past recessions, and have the potential to thrive in whatever may be headed our way. And through all economies, only the best stocks — about 4% of them — are the reason stocks outperform Treasuries to begin with.
Here at TradeSmith, our advanced research tools and leading experts give you everything you need to buy those stocks… and not suffer the moves of the broad market. Before we get there, let's have a closer look at all these warning signs.
It really can't be overstated how bad the yield-curve inversion is. Take a look.
This is the 10-year Treasury yield minus the 3-month yield – one measure of the "yield curve." This tells us that loaning money to the U.S. government is paying more on the short term than the long term.
Previously, the curve has dipped below 0 — the black line running through the middle of the chart — four times. Each time, as the yield curve has recovered and gone positive, a recession ensued.
But this time is nothing like those times. Let's compare each inversion:
In 1989, the yield curve inverted from April to November 1989 — 7 months. The recession that followed lasted from July 1990 to March 1991 — about 8 months.
In 2000, it inverted from June to January of 2001 — again, 7 months. The recession that followed lasted from March 2001 to November — again, 8 months.
In 2006, the yield curve began inverting in June and recovered a year later, before dipping one last time and recovering for good in August. That's a 14-month period. The recession that followed was much worse, lasting from December 2007 to June 2009 — or about 18 months.
In 2019, the yield curve inverted slightly from April 2019 all the way through February 2020, when a recession began immediately and lasted just two months.
The yield curve has currently been inverted since September 2022, about 15 months. It's also been the deepest inversion ever, more than double the next-deepest inversion in 2000.
History may neither repeat nor rhyme this time around. COVID changed a lot of things. But the simple fact is the yield curve has been upside-down for longer than it has in 40 years, and it's twice as bad as it's ever been.
Bottom line, it's something to watch. Bonds are still paying out great risk-free yields, and that will suck some of the wind from stocks' sails.
• The labor market is holding firm…
Let's turn to the jobs report.
The U.S. economy added 199,000 jobs in November, above October's report at 155,000 and well above the expectations of 183,000.
A lot of this is due to the 47,000 auto and motion picture workers that were on strike. So, there is an anomaly to be aware of in this data.
It's also noteworthy that job gains have been revised downward every single month this year, save for July, which saw an upward revision, and October, which has yet to see a revision.
Regardless, a pre-recessionary economy is not one where you expect month-over-month job gains. The economy is strong, and that's giving the Fed room to keep rates higher for longer.
As we mentioned earlier, traders' expectations for Fed rate cuts were slashed after Friday morning's numbers. The expectation for a 0.25% rate cut by the end of January fell in half. And the expectation for rates to stay the same through the end of March surged higher.
Economic surprises are… no surprise in a post-COVID world. We should be ever mindful of the possibility of data to catch us flat-footed.
But if you'll allow me, I'd posit that we shouldn't worry so much about economic data whatsoever.
Because economic numbers are not what drive the greatest stock returns. Great stocks are.
Focus on great stocks, and you're golden. That's been our beating drum here in TradeSmith Daily for weeks, and for good reason.
With so many strange events happening across the economy (longest bear market for bonds since Civil War... unprecedented bank closures... and soaring prices) – it's no wonder the richest investors are loading up on gold. But what you might not realize is there's a much better way to profit from rising gold prices – without ever touching an ETF, mining stock, or even bullion.
In a legendary study, Hendrik Bessembinder evaluated the long-term performance of stocks over Treasury bills.
He found that, indeed, stocks outperformed Treasuries over the long term – no big surprise there.
But what he also found is that just 4% of stocks over that span of time are responsible for the gains that exceed the returns of Treasuries.
Think about all the stocks you've ever owned, directly or indirectly. Now think about the fact that there was roughly a 4% chance that any one of those stocks was beating the market.
It might make you reconsider your exposure to target date retirement funds… ETFs… and any other "buying the market" type of vehicle.
And if you are questioning such things, you're not alone.
• Jason Bodner insists on buying great stocks and not much else…
And he came to this conclusion not just from reading Hendrik Bessembinder's paper.
Early in his career, Jason worked at Wall Street firm Cantor Fitzgerald as a central dealmaker. He brokered orders for some of the biggest, most influential wealth funds in the world.
He saw firsthand how institutional order flows made big waves in the stock market. But what most don't know is they do this out of the public eye, in what are called dark pools, until it's far too late for any everyday investor to ride those waves.
And like clockwork, these firms continually bought the stocks with the strongest fundamentals, in the most resilient uptrends.
It was something of a "Eureka" moment for Jason, when he realized that every great stock has these three factors.
And since he left Wall Street, he used this firsthand knowledge to design a stock-picking system that not only chases the money flows of the world's most powerful investors, but filters out any stock that doesn't meet a strict criteria of excellence.
And… that's it. Jason doesn't recommend folks do anything but buy great stocks and insist on their quality.
In doing so, Jason's designed a system that's shown to beat the S&P 500 by 7-to-1 since 1990. You can see the difference in the chart below (Jason's system in black, the S&P 500 in blue.
The difference is stark. Starting 32 years ago, trading Jason's system instead of buying and holding the S&P 500 results in gains of 7 times more.
And that's precisely because Jason understands that — whether we're in a recession or not, hard landing or soft — so long as you buy only great stocks and sell them when they're overpriced or not great anymore, you will beat the market handily.
If you've been reading TradeSmith Daily, you already know that Jason's set to reveal more about his methods this Wednesday, Dec. 13.
And if you'd like a sneak preview of what's to come, including access to Jason's watchlist of 20 stocks and their rating on his proprietary Quantum Edge scoring system, you can click right here to sign up.
As I write, 12 of the stock on that watchlist are buys. That alone should get you excited to sign up.
But what's coming on Dec. 13 will be even bigger, as Jason's set to share a few details about six upcoming recommendations for readers of his Quantum Edge Pro newsletter. The only way to get those details is to join us this Wednesday, so be sure to sign up here before then.
To your health and wealth,
Michael Salvatore Editor, TradeSmith Daily
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TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
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