A yield curve inversion in March prompted a red signal in the ClearBridge Recession Risk Dashboard. But the overall signal remains in expansionary territory (green), a positive for equity investors.
- The equity and fixed income markets are sending contradictory messages about the direction of the economy, but we believe weakness priced into sovereign yields will abate.
- A yield curve inversion in March prompted a red signal in the ClearBridge Recession Risk Dashboard,1 however the overall signal remains in expansionary territory (green), which is a positive for equity investors.
- Signs of global economic weakness could portend increased volatility in the near term, but we continue to view any equity pullback as a long-term buying opportunity.
Equities Look Darkest Before the Dawn
Over the past several months, global equity indexes have sharply rebounded from the Christmas Eve lows and are nearly back to all-time highs. However, with economic data continuing to deteriorate, many investors remain confused about the path forward.
Equities vs. Fixed Income
Exhibit 1: 3m10y Yield Curve
While we believe the yield curve is important, it is best viewed in conjunction with an array of additional indicators.
Exhibit 2: History May Suggest a Cut
Exhibit 3: ClearBridge Recession Risk Dashboard
Exhibit 4: Fed Inflation Target
U.S. vs. Global Economy
The domestic soft patch in the first quarter is likely a function of seasonality. Throughout the current cycle, first-quarter data has been weak, with the Bureau of Economic Analysis recently acknowledging challenges regarding how it adjusts the data for seasonal impacts. Further, the government shutdown, delayed tax refunds and consumer apprehension in light of market volatility are all likely to weigh on GDP in the near term (Exhibit 5). However, the good news is a rebound should materialize. While many believe the sugar high from the Tax Cuts and Jobs Act of 2017 has worn off, fiscal stimulus related to that bill (tax refund boost) is actually larger in 2019 than it was last year, as is the most recently authorized fiscal budget (Exhibit 6).
Exhibit 5: 1Q Has Disappointed
Exhibit 6: Fiscal Stimulus % of GDP
Exhibit 7: Taiwanese Activity Leads the U.S.
Exhibit 8: Global Stocks Lead Earnings
2 Purchasing Managers Indexes (PMI) measure the manufacturing and services sectors in an economy, based on survey data collected from a representative panel of manufacturing and services firms. PMI greater than 50 indicated economic expansion; below 50, contraction.
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