2Q Newsletter – July 2022

What is The Yield Curve Telling Us?

The chart below shows the first half return of the S&P 500. The approximate -20% return this year is the worst since 1970. The good news is up periods usually follow down periods and the ups outnumber the downs more than 2 to 1.

The market is fearful of our economy sinking into a recession. The economic indicators we follow are about 50/50, but investor sentiment is pretty bearish. The graph on the next page is the two-year U.S. treasury yield (red line) vs the ten-year yield (blue line) going back to the peak in interest rates in 1980. The shaded areas are recessions. The yield curve is flirting with inverting (short rates exceed long rates). An inversion is seen as a signal of an economic downturn because it has preceded every recession since the 1970s, but not all inversions or near inversions resulted in recessions.  

The graph below is a close up of the 2-year and 10-year yield for 2022. The yield curve, using these measures [the 2-year and 10-year] did invert for a few days in early April. The bulls would tell you the longer the inversion the more concerning, so those couple of day inversions are meaningless. The bears, on the other hand, would say an inversion is an inversion.

Historically, there is a lag between the inversion and the onset of a recession. The following chart shows the lag time for the most recent 5 inversions / recessions.

We put together graphs of the 5 previous inversions/recessions (see appendix) as well as the present time period located below.

Sometimes the market goes up between the inversion and the beginning of the recession. Sometimes it goes down. Sometimes the market goes down during a recession and other times it goes up. Sometimes it goes up and down. While yield curve inversions and recessions are extremely important to the economy and the stock market, the stock market does not dance to that tune. Today, we know we had a minor inversion in April. The economy [real GDP] decreased by 1.6% in the first quarter. Some are calling for a negative second quarter, which would give us two consecutive quarters of negative GDP (a recession). So this would indicate that the recession started four months before the inversion? Does this seem plausible? We shall see.

What we do know is the Federal Reserve, after trying to increase inflation by lowering rates and growing the balance sheet, seems to have overcorrected. The prices of everything, except your investment fees, have gone up. The Fed has gone from accommodative to restrictive, making bonds now much more attractive relative to stocks than they have been in recent history.

Stocks have gone from somewhat overvalued to being much more fairly priced. So far, earnings have held up. On a positive note, we anticipate the vast majority of our core stocks will continue to increase their dividends again this year. Keep in mind, you are investing in companies, not pieces of paper. No matter how hard you try, you are highly unlikely to outguess the market.

We hope you are having a great summer. If there is anything we can help you with, please let us know.     

Written by David Meyer


We are excited to announce that Monarch is transitioning to a new portfolio management system, Tamarac. Envestnet|Tamarac , a division of Envestnet, Inc. (NYSE: ENV), is a leading provider of integrated, web-based portfolio rebalancing, performance reporting and customer relationship management software for independent advisors and wealth managers. Next quarter, you will notice that the layout and design of your quarterly statements will be modified as a result of this transition. Monarch also utilizes Envestnet’s MoneyGuide financial planning tool. Contact us if you need assistance with your financial plan. 



S&P 500 Chart: Jan. 1978 – Dec. 1981

S&P 500 Chart: July 1980 – Dec. 1982

S&P 500 Chart: Jan. 1988 – Dec. 1991

S&P 500 Chart: Jan 2000 – Dec. 2002

S&P 500 Chart: Jan 2005 – Dec. 2009