Coronavirus Update: 3/16/2020
Allen, I wanted to follow up on our conversation from February 24th. Remind us again how bonds and equities perform around recessions.
Historically, markets discount future events. So the typical pattern would be for equities to top just prior to a recession and bottom during the recession, once investors can see an upturn in the earnings picture. Meanwhile, the yield curve typically inverts prior to a recession then regains its slope during the recession. In short, the typical pattern generally suggests that during a recession one should find relatively high bond prices and relatively low equity prices until one can see the finish line. Since World War II, most recessions have lasted 16-21 months. I would point out that equities are lower than they were 21 months ago and government bond prices are certainly high.
What are markets reflecting now?
Last month you will recall the yield curve was still inverted. Now, you can see that the slope and shape of the yield curve has changed to a more normal shape. You can see the slope starting up in about 3 months continuing up from there. I view this as a real positive against some ugly headlines.
Source: Bloomberg
Looking at investment grade corporate yield curves – one can see we are still inverted out to about the 1-year mark, so there are clearly recessionary stresses, but I do believe governments are engaged in trying to ease the financial stress.
Source: Bloomberg
If markets are reflecting a recession, should investors change their allocations or just rebalance?
I always remind people, knowing your time horizon is probably the most important factor in investing. Most investors are better off riding through the business cycle than trying to time it. Part of good investing is the regular rebalancing of accounts.
Any Final Thoughts This Morning?
When the headlines get this bad, I have always found it helps to revisit the first lines of Rudyard Kipling’s poem “If” before I make a decision.
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