Investment Perspectives April 2023
Investment Perspectives April 2023
Investment Perspectives April 2023
INVESTMENT PERSPECTIVES
APRIL 2023
Key Takeaways —
• A n examination of whether the recent • Is the shape of the yield curve a • S econd quarter begins with some
bank failures carry further implications sign of an imminent recession, or valuable lessons for investors.
for the economy. a false positive?
© JANNEY MONTGOMERY SCOTT LLC • MEMBER: NYSE, FINRA, SIPC • INVESTMENT PERSPECTIVES, APRIL 2023 • REF: 1036500-0423 • PAGE 1 OF 5
The Takeaway for Investors
The quandary for equity investors is allocating capital for
the competing prospects of dissipating inflation concerns
but slowing growth against the possible avoidance of a
recession, which could happen if growth stays resilient
and the banking fervor is properly ring-fenced.
Playing both sides through a conservative and prudently
allocated portfolio—a posture we have advocated for the
last few months—continues to be sensible in our view given
the aforementioned uncertainties that are far from resolved.
We will tactically adjust our risk budget as we develop
higher confidence in the path the economy will take.
Stay tuned.
© JANNEY MONTGOMERY SCOTT LLC • MEMBER: NYSE, FINRA, SIPC • INVESTMENT PERSPECTIVES, APRIL 2023 • REF: 1036500-0423 • PAGE 2 OF 5
A VOLATILE YIELD CURVE
Guy LeBas, Chief Fixed Income Strategist
twitter.com/lebas_janney
For decades, investors and predicting a recession. Incidentally, while we used the 2s/10s
economists have relied on the spread as an inversion measure, academic studies have
shape of the yield curve as suggested the 6-month/2-year spread is timelier, and that
an indicator of fundamental spread too is inverted.
growth prospects and
financial risk-taking. We can imagine one escape path in 2023: Inflation is high
but falling, and the U.S. could skirt recession if inflation fell
During the course of the last 12 months, that shape quickly enough. Since recessions are typically triggered
has changed wildly—as fast as at any point in the last by negative real economic growth (nominal economic
40 years. For simplicity’s sake, we often focus on the growth minus inflation), if inflation drops faster than
difference between 2-year and 10-year maturities in nominal growth slows, real growth could remain positive,
evaluating the shape of the yield curve, also known as and the Fed might still cut rates. In that scenario, the
the “2s/10s spread.” bond markets’ inversion would still be “correct,” but the
economic outcome would be benign. There is a chance
As Chart 1 highlights, 10-year yields have been above
of this “Goldilocks” scenario evolving, but it requires
2-year yields for about 92% of the months since the late
several unlikely things to happen at once.
1970s. Since June 2022, however, the 2s/10s spread has
been “inverted” with 10-year yields below 2-year yields.
Bond Market Gauge
Historically, an inversion has indicated high likelihood
(though not certainty) of a significant economic slowdown The extreme volatility in the shape of the yield curve—a
or recession on the horizon. better timing tool than inversion alone—is bond market
Chart 1: 2s/10s Spread Has Been Positive in 510 of 550 Months evidence that does signal impending economic stress.
When Negative, Good Chance of Recession
Chart 2: When 2s/10s Spread is Negative and Volatile, Recession is
Typically Close
Sign of a Slowdown?
The 2s/10s spread has been swinging wildly during the
Although an inverted yield curve indicates a good first quarter of 2023, starting at -0.55%, notching a low
chance of recession, the signal has issued a handful of of -1.08% in early March, and finishing again at -0.55%.
false positives, making it a “necessary but not sufficient” With the exception of the sudden stop during the 2020
condition for a slowdown. Moreover, inversion is a terrible recession, each economic downturn over the past 45
timing tool, as the period between inversion and recession years was preceded by a negative 2s/10s spread, plus
(if it happens) varies widely. a doubling in spread volatility.
A better way to think of a yield-curve inversion is as a signal The median time between increased volatility and recession
about Federal Reserve policy. When short-term rates are onset was three months, with a range of one to four months,
higher than long-term ones, the bond market is telling us the and there have been three false positives. No economic
Fed has set overnight interest rates at a contractionary level indicator is perfect, and perhaps 2023 is the time that breaks
and will probably have to cut those rates. The Fed typically this one’s track record, but the bond market is decidedly
cuts rates in the face of a recession, so it follows then that flashing amber on recession risk.
a yield-curve inversion is correlated with bond markets
© JANNEY MONTGOMERY SCOTT LLC • MEMBER: NYSE, FINRA, SIPC • INVESTMENT PERSPECTIVES, APRIL 2023 • REF: 1036500-0423 • PAGE 3 OF 5
LESSONS APPARENTLY NEVER LEARNED
Gregory M. Drahuschak, Market Strategist
Advice most often attributed to Second Quarter Begins
Winston Churchill says: “Those
that fail to learn from history April trading began after the S&P 500 spent March exceeding
are doomed to repeat it.” In the levels of potential technical resistance at its 200- and 50-day
investment world, not learning moving averages and 4,050 before moving toward 4,100,
from history can be costly. where the index might reach an overbought condition.
Chart 3: Year-to-Date 2023 Sector Percentage Changes
Of all the mistakes investors might make, reaching too far
for yield is the worst and it often occurs in situations least
able to withstand the potentially negative consequences.
© JANNEY MONTGOMERY SCOTT LLC • MEMBER: NYSE, FINRA, SIPC • INVESTMENT PERSPECTIVES, APRIL 2023 • REF: 1036500-0423 • PAGE 4 OF 5
DISCLAIMER
The information herein is for informative purposes only and in no event should be construed as a representation by us or as an offer to sell, or solicitation of an
offer to buy any securities. The factual information given herein is taken from sources that we believe to be reliable, but is not guaranteed by us as to accuracy
or completeness. Charts and graphs are provided for illustrative purposes. Opinions expressed are subject to change without notice and do not take into
account the particular investment objectives, financial situation or needs of individual investors.
The concepts illustrated here have legal, accounting, and tax implications. Neither Janney Montgomery Scott LLC nor its Financial Advisors give tax, legal, or
accounting advice. Please consult with the appropriate professional for advice concerning your particular circumstances. Past performance is not an indication
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Employees of Janney Montgomery Scott LLC or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ
from the opinions expressed within. From time to time, Janney Montgomery Scott LLC and/or one or more of its employees may have a position in the securities
discussed herein.
© JANNEY MONTGOMERY SCOTT LLC • MEMBER: NYSE, FINRA, SIPC • INVESTMENT PERSPECTIVES, APRIL 2023 • REF: 1036500-0423 • PAGE 5 OF 5