Wait and see mode
This week the yield curve inverted again meaning the 10-year US Treasury yield is higher than the 3-month yield. Past history says this is one of the more reliable indicators of a recession in the next couple of years. This works except when it doesn’t. It did not work from 2023 through mid 2024 so although it has worked in the past, how concerned we should be depended on other factors. Today the understood popular variable that the Fed looks at for inflation came in as expected indicating currently inflation-at least by this indicator-is coming in as expected. Other indicators show more concern. Consumer confidence is waning based on reliable surveys and today the Atlanta Fed GDP now indicates a first quarter of 2025 of negative growth. Consumers are sitting on their hands as indicated by declining consumer spending in January Year to date gains in the SP500 are negligible while overseas developed stock markets have gained 7%. The stronger dollar and uncertainty over domestic trade and political policy have caused domestic markets to stay flat with February experiencing a decline in averages while overseas markets have increased in value. The worst condition for markets is uncertainty. We have an abundance of uncertainty currently however markets, although volatile daily, have remained sanguine considering….Tariffs on Canada and Mexico are expected to be imposed next week. Despite the policy uncertainty, timing markets remain problematic. Even today markets reacted to a meeting of Zelensky and Trump by selling off and then rallying later in the day. Head spinning. Also, bitcoin values declined significantly this month indicating some aversion to risk by market participants.
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The worst outcome for the next year is stagflation last experienced in the late 70’s and early 80’s. This is an environment with rising interest rates and inflation high and slow or nonexistent GDP growth. The Federal Reserve is in a wait and see mode as indicated by the latest Fed minutes and so are we.
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