Over the last couple of years, there have been predictions of a recession that has yet to materialize. One of the reasons for the prediction was the inverted yield curve, defined as when long-term government bond yields are lower than short-term bond yields. Usually, ten-year bond yields are higher than two-year bond yields. And when they invert, it is generally associated with investors' expectations for a decline in longer-term rates which is typically associated with recessions.
The yield curve first inverted in mid-year 2022 and has been negative ever since. But over the last two months, that has changed. Long-term yields have climbed higher due to strong recent economic data plus the anticipation of more government debt being issued due to deficits, creating a lot of supply and providing upward pressure. Short-term yields have been falling following the fall in inflation and the Federal Reserve cutting short-term rates with the anticipation of more cuts to come (BTW, some economists follow the yield curve using the ten-year bond minus the even shorter-term Fed Funds rate, which is still slightly negative. But the Fed Funds rate is expected to drop further in the coming months too). The chart below depicts the difference in the ten-year bond yield minus the two-year bond yield over the last five years and how it has returned to positive territory lately.
The moral of the story is that even though the yield curve has been a good predictor of recessions in the past, it should not be viewed in isolation. Investors should use the yield curve alongside other predictive metrics alongside other measures such as employment trends, gross domestic product growth, and corporate earnings (and possibly the economic response to the first pandemic in a century!) to form a more comprehensive view of where the economy is heading.
Is Russia Close to Done in Ukraine? Many economists have been surprised by the resiliency of the Russian economy in the face of international sanctions. But this may be coming to an end. Some experts believe that Russia is not producing military equipment at or above replacement loss rates and will run out soon. They are also running out of workers since many are either fighting, dead, injured, or they fled the country, so high wages are needed to attract workers for military factories. This has choked off the consumer/non-military economy which can’t compete for workers financially or even use the debt markets since inflation has skyrocketed financing above 20%. This doesn’t leave Russia with many good options without outside help (i.e. North Korean fighters). Bringing back wounded or traumatized troops may not be an option either as that can lead to political instability like it did in Europe after WWI. Russia may have no other option than to continue fighting in the hopes of winning financial gains (territory, materials, minerals, food, etc.). But the reality may be that Russia is at a breaking point. Russia's War Economy Is Hitting Its Limits
Financial Planning/Investment Strategy Corner:
Should Retirees Invest Differently to Produce More Income? We sometimes get the question from clients as they approach retirement, should they invest differently, such as in high-dividend paying stocks? Our philosophy is not to for many reasons. One reason is that higher dividend-paying companies tend to be concentrated in a few sectors, such as utilities, real estate, and banking and therefore diversification is compromised. Also, many companies have higher dividend yields because the stock price has dropped due to poor prospects which could make the dividend. Conversely, many successful companies have no or very low dividend yields as they are plowing profits back into the company creating new products and increasing revenue and value. The chart below compares an investment in three different ETFs: One that follows the S&P 500 (SPY), one that is invested in high-dividend paying companies (VYM), and one investing in dividend-growing companies (VIG). Over the last ten years, the S&P investment has well outperformed the dividend-paying investments in total return.
Lastly, dividends may be less tax-efficient than capital gains, thereby reducing after-tax income. Our philosophy is a total return approach implementing a well-diversified portfolio balancing risk, capital appreciation, and after-tax return creating a client’s own “personal dividend” with systematic withdrawals.
Chart: Koyfin
Quick Hits:
- The U.S. postal service will honor Betty White with a stamp in 2025: NPR
- Can a weighted vest supercharge your workout? WSJ Healthline
- Greenland may be the next hot tourist spot for U.S. travelers: WSJ
- A great biscuit recipe for Thanksgiving: Kristine’s Kitchen
- Wine pairing suggestions for the big meal: Wine Enthusiast
- Here are some movies to get you in the Thanksgiving spirit: Get Pocket
Changing How You Think About Aging Can Add Fulfillment and More Years: Challenging stereotypes about aging and emphasizing the power of a positive mindset can enhance health and longevity. Studies reveal that individuals with positive perceptions of aging live, on average, 7.5 years longer and experience better neurological and cardiovascular health. Negative stereotypes, conversely, increase stress and discourage healthy behaviors, potentially creating a self-fulfilling cycle of decline. You can age with purpose by balancing intellectual pursuits, physical fitness, and creative exploration and embrace aging with curiosity and humor. Also, mentoring and intergenerational relationships can encourage healthier behaviors and a more optimistic perspective. WSJ
Quote: “Too many people, when they get old, think that they have to live by the calendar.” John Glenn, astronaut, U.S. Senator, and the oldest person to board a Space Shuttle at age 77.
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