This article will make quite the case for value investing and its sheer power during such uncertain, unprecedented economic times as we dive into what is being largely overlooked.
First, it is quintessential to recognize that inflation is the key volatility driver at this point in time. Inflation, as of the writing of this article, is sitting at 9.1% – a four decade high.
This means, of course, tremendous pressure is put on the Federal Reserve to act promptly to tame inflation.
While the Federal Reserve has carried a consistent message regarding their priority on fighting inflation while following through with hiking benchmark interest rates, the question becomes whether they should act even more aggressively.
However, raising interest rates too quickly gives way to investors’ concerns about falling into a recession.
By definition, a recession is when two quarters worth of negative GDP are recorded. Interestingly, in Q1, GDP dropped by 1.6% and then fell once more in Q2, only slightly, but down nonetheless, by .9%. This places us, by very definition, in a recession already.
But there is more economic data being overlooked.
The second piece of overlooked economic data is the yield curve, one of the more foretelling signs of a recession which, again, by definition we are already in, remains inverted.
The yield curve is a line that plots the interest rates of government bonds with different maturity dates. When the yield curve is flat, it is interpreted as “weak growth,” but if it is sloping upward, a positive sign, the correlation is “strong growth.”
As for an inverted curve, like we have now, with the 2-year yield having fallen to 3.23% whereas the 10-year yield is 2.82%, red flags should be raised.
Not only has the yield curve been inverted for weeks, but the gap between the 2-year and 10-year has been widening.
Value Investing Still Works
Why then has the market not been shaken to levels of utter despair?
The answer lies within the labor market, which is at a historical low, hovering at 3.5% after the latest jobs report came in depicting an addition of 528,000 jobs.
That’s quite the inverse from expectations and what we have seen in the past.
Therefore, a strong labor market is allowing for those rose colored lenses to be worn by the everyday, retail investor during times in which some of the strongest economic indicators are demanding caution.
In other words, it will pay to be PAY-tient.
Until inflation peaks with consecutive months worth of data as well as a reversal of the yield curve’s current course, investors are wise to focus on value investments with a longer-term outlook.
Sure, the strategy may not be as alluring nor as fun as the gamble of high-growth opportunities, but it sure will help avoid that uncomfortable feeling if the market is to swing more intensely within the next 6 – 12 months.