Those who assume the recent inversion – and reversal – in the U.S. Treasury yield curve are foreshadowing an oncoming recession might be missing the point, said Jeffrey Kleintop, senior vice president, chief global investment strategist at Charles Schwab.
Instead, the steady decline in long-term rates speaks to pessimism about the prospects for the global economy, Kleintop told advisors Monday evening at the 2019 IMPACT conference in San Diego.
“The hint is actually a long-term one when we get an inversion,” he said. “It says something important about the long term. The market is reassessing its growth outlook, and where expectations were the highest, they’re starting to come down.
With the pessimistic heart of an economist, Kleintop said that though 2019 has been an excellent year for investors, there are some clear signs of weakness.
Kleintop’s comments contrasted from when he addressed advisors at the 2018 IMPACT conference, which occurred amid a fourth quarter downturn. Now, U.S. markets are up nearly 20%, and equity returns have been stronger elsewhere in the developed world.
Nevertheless, he said that advisors should be cautious in the months ahead. “There are a couple of changes in long-term asset classes that are going to catch a lot of investors by surprise,” said he said.
In late 2018, the Federal Open Market Committee was still on a gradual path of increasing interest rates and many investors were wary about a market top.
But on Monday, Kleintop noted that the Fed had made three straight rate cuts and investor sentiment improved significantly – but like the yield curve inversion, investors may misunderstand the role of central banks in today’s economy.
“What’s changed? Has the economy rebounded? Has the trade war been resolved? Have earnings bounced back?” he asked. “The only thing that really changed was that central banks interest rates went from going up to going down, and for investors, it was like ‘problem solved. We got rate cuts, case closed, done deal.’
“Those investors might be watching too many super hero movies,” said Kleintop, who branded central banks ‘Guardians of the Economy,’ a play on Marvel’s popular Guardians of the Galaxy film franchise.