Don’t Slight Historical Wisdom

Doug Drabik discusses fixed income market conditions and offers insight for bond investors.

In an era of instant gratification, it should not be a surprise that the market has been trending ahead of itself. The competitive nature of this country has developed technology, produced goods, created wealth and shaped our world prominence. Perhaps some of this competitive nature has seeped into our desire to be the first to predict the future. Perhaps it’s about crafting media sensationalism to prop viewership. Perhaps it’s about a craze that rewards originality even in the face of historical wisdom. Whatever the reason, it feels like we have been pressing the issues. In the midst of this chaos, clients yearn for a clear picture of our economic path while figureheads demand precision timing and exact answers on how events will play out. I’ve been in this game for over thirty years and for however much that collective wisdom counts, the only thing I can say with certainty is that there is none. However, economic cycles often follow similar patterns and historic analysis can unfold a reasonable likelihood serving to assist investors with appropriate fixed income investing.

Consider this commentary as a trailer to this week’s release of the Fixed Income Quarterly which is dedicated to correlating our current economic cycle with historic economic patterns. More importantly, it reveals how this elevated interest rate environment has extended a very unique fixed income opportunity to not only serve as a guard for one’s wealth but aid as an impactful income tool.

 Treasury 10 Year to 3 Month TBill

One takeaway is that inverted curves precede recessions. You will hear arguments that this isn’t always true but that viewpoint isolates mini-time ranges rather than viewing wide ranges of time as depicted on this graph. It also seems reasonable to note that the longest inversion period resulted in the longest recession (December 2007 to June 2009). Lastly, the ensuing recessions start on average, 4-5 months after the curve normalizes and becomes upward-sloping.