Bull Or Bear: Your Investment Strategy For 2019

The longest bull market in history has taken both experts and novices by surprise. So every now and then, there is this conversation about the possibilities of a recession and what we should do to prepare for it. There have been many such conversations through 2018, but a recession never materialized, as the market and the government appear to have gotten smarter at aversion. Or at least at ensuring that earlier indicators won’t be valid this time around.

Take the lead indicator yield curve inversion for example. In an expanding economy, government bond yields surpass short-term yields because of greater optimism about the future. When short term yields exceed long term yields, the inversion is an indication of uncertainty about the future.

But monetary policy has effectively kept long term rates low so bond yields remain attractive and spending by both the government and corporations can continue. Still, the gap between 10-year and 2-year yields continues to narrow, indicating that a bear market may be in the offing.

Another indicator is a pickup in M&A activity, which is a typical occurrence toward the end of the business cycle. But M&A has been robust in the last few years with no signs of a bear market. The last year has seen a fresh spate of activity, but since companies aren’t in distress, this may or may not be a valid signal.

The story appears even more positive if you consider the high-yield spread, which is the difference between the yields in below-investment-grade corporate debt and “risk-free” U.S. Treasurys. When the economy is strong, the gap/spread is typically smaller as the risk of doing business is relatively low.

As recession fears near, however, opportunities shrink and it becomes harder to do business. As a result, companies need to pay more for significantly riskier ventures. The high-yield spread has risen during the last two recessions, but as the chart below shows, it remains at acceptable levels right now.

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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this ...

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