November 2022 PDS Planning Market Commentary
The Dow Jones Industrial Average had its best month since 1976 posting a return of 14% during October. Investors were hopeful comments from the Fed indicated a slowdown in inflation was on the way and therefore a slowdown to rate increases. But, as we’ve seen time and time again this year, inflation surprised economists on the high side. Fed chair Jerome Powell reiterated the central bank would “stay the course until the job is done.” Markets were quick to react, resulting in negative returns across the three major indices – S&P 500, Nasdaq, and the Dow.
At the same time the Dow was racing to recover losses, the yield curve became inverted. The yield curve represents US Treasury rates from 3-months to 30 years. A normal sloping curve is positive, where the short-term rates are less than the long-term rates. The longer the maturity, the greater risk there is to invest, and therefore the greater the expected reward. When the curve inverts, short-term rates are greater than long-term rates. In this case, a 3-month Treasury has a more attractive yield and a 10-year Treasury. Why?
When this happens, it signifies investors are pessimistic about the economy and have been rushing to buy longer term bonds for security. When the demand increases, bond prices will rise and thus yields will drop. The inversion is exacerbated by the Fed raising rates, which have a much stronger impact on short-term yields.
An inverted yield curve does not cause recession, instead it’s a representation of how investors view the economy. It’s an indicator, not a forecast. And while the curve has inverted, a lot can change in the next few months to help to avoid a possible recession.
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