Rates continue to rise along with concerns of an impending recession.
The narrative is quickly shifting back to tighter monetary policy following last week’s higher-than-anticipated CPI and strong economic data. I don’t pay too much attention to this gossip. But I do keep a pulse on the latest discourse surrounding markets.
With these newfound recessionary fears circulating, I want to share a chart I like to avoid… The 2s10s treasury spread.
I can’t remember the last time I wrote about the yield curve. It’s been so inverted (deepest inversion since the early 80s) for so long that I honestly don’t know what to think.
Nevertheless, the overlay chart of the Staples sector $XLP relative to the S&P 500 $SPY with the 2s10s spread conveys an important piece of information:
Despite an inverted yield curve, the relative downtrend in staples remains intact.
Why does this matter?
Defensive leadership (a rising XLP/SPY ratio) accompanied by an inverted yield curve often leads to economic recessions. It happened in 2000 and late 2019.
So, will the most recent signal from mid-2021 come to fruition? Is the US economy set to fall into a brutal recession?
I don’t know. But Staples have been falling vs. the broader market since December. Perhaps we’re making our way out of a recession now.
More importantly, it doesn’t matter.
I don’t trade recessions. I trade markets. Honestly, I could take the 2s10s off the chart and get all the information I need.
If staples are outperforming, that’s where I want to look for relative strength as risk assets likely experience selling pressure. It’s that simple.
Can you imagine investing based on economic fears that the market completely ignores? That sounds awful.
Bottom line: There’s still plenty of fear and uncertainty out there. But in reality, there always is. Uncertainty never goes away.
Change and uncertainty are constants in life. The only way to cope with the unknown – or the market – is to have faith in yourself and your plan.
It also helps if you listen to those with your best interest in mind – and pay attention to what really matters.
Stay tuned.
Countdown to FOMC
Following the recent 25 bps hike, the market is pricing in another single-hike at the March meeting.
Here are the target rate probabilities based on fed funds futures:
