“Stocks haven’t looked this unattractive since 2007”, reads the headline of a Wall Street Journal article from last April,¹ referring to the risk vs reward of owning equities over bonds. The sentiment will probably carry throughout at least the remainder of the year 2023, so long as the yield curve remains inverted (short-term interest rates are higher than the long-term interest rates).
The U.S. Department of Treasury reported the 1 Yr yield on Treasuries at 5.49%, as of the time of this writing, compared to the 30 Yr yield rate of 4.81% ², and cash equivalents haven’t been this rewarding in over 16 years. We learned from Econ101 in school, that an inverted yield curve is a historical sign of an impending economic downturn. The St. Louis Federal Reserve Bank illustrates on the top of this page that an inverted yield curve has preceded every recession since 1957.³
And what about stocks? With the S&P 500 trading at 19 times its expected earnings over 12 months (historical average is 15.6 times) ⁴, it is my opinion that our defensive stance against risk premium (and overvalued) driven investments deserves more merit than disregard.
It may not be attractive or exciting (most definitely unpopular) to pass on the tech and AI driven momentum, especially when the media outlets and large bank analysts continue to express their “soft landing” call. I don’t believe they’re oblivious to the data, but this time around, they may just turn out to be excessively hopeful. The signal remains as clear as it has been in history, if we believe that fundamentals do matter in investing (over technical), which we do. Like Mrs. Ojeda (R.I.P.) used to remind me, “There’s some things you just don’t have to go to Harvard for.” This is probably one of them. Prepare for landing.