Recession talk has dominated headlines and TV talking head discussions for the past several weeks. The reason is obvious. The U.S. Treasury yield curve inverted in the 3-month-to-10-year segment.
Inversion is when shorter maturities have higher yields to maturity than longer maturities. This inverted curve has been a reliable indicator of recessions in the past. Parts of the yield curve inverted months ago, but the 3-month-to-10-year segment is considered the strongest indicator of a coming recession. Suddenly, pundits and politicians (especially those challenging Trump) were yelling about “recession” night and day.
This was true even for politicos who can’t explain what the yield curve is and who wouldn’t recognize an inversion if it bit them on the ankle. It didn’t matter. Just yelling “recession” as a way to bash Trump was good enough for their purposes.
There are only two problems with this approach. The first is that when yield curve inversion signals recession, it usually does so 18–24 months in advance. This might mean that a recession is coming in early 2021 (after the next presidential election) but it says little or nothing about the odds of a recession in 2019 or 2020.
The second problem is that there is no other confirmatory evidence. Yes, the yield curve inverted, but other indicators such as housing prices, unemployment, initial claims, service sector output, commodity prices and many more are not signaling recession. It’s good to be attentive and the yield curve does warrant watching, but it’s far too soon to be calling for a recession.
Still, Trump’s reelection in 2020 may hinge on that. Generally speaking, presidents who seek a second term are always reelected unless they have a recession late in their first term. This happened to Jimmy Carter and George H.W. Bush. Both lost reelection bids because of recessions on their watches.
Trump knows this, and as this article reveals, he is taking steps to fend off a recession should one appear on the horizon. Trump wants to rely on Fed interest rate cuts to prop up stock markets and postpone any recession. But if the Fed does not cooperate or interest rate cuts don’t work, Trump’s tool kit includes massive infrastructure spending, possible tax cuts and industrial bailouts.
Trump could also reverse course on the trade wars. Investors who watch for signs of recession (something we do in our publications) can also anticipate Trump’s tool kit and invest in those sectors most likely to benefit from new tax cuts and spending.
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