Inverted Yield Curve – Signal to Raise Cash and take risk off the table

US yield curve turned negative on Friday for the first time since the last recession of 2007.

This has occurred every time before the last eight recessions since 1968

Economic growth continues to fall sharply in both China and Europe

An inverted yield curve where 10 year Treasury rates fall below 3 month Treasury Bills, implies that investors are losing confidence in the economy

If this inverted yield curve persists, banks will materially reduce lending as it becomes unprofitable with a negative spread

US / China trade wars continue without any clear signs of compromise from either side

The probability of an economic recession within the next 12-18 months has increased significantly from last month

Conclusion

While it is still too early to be 100% certain of an impending recession, it is critical to take risk off the table at this time

The recent market rebound has provided us with an opportunity to do so

Raise cash if you have not already done so

Maintain high cash levels. My Income and Growth sample portfolios have 35% and 30% cash respectively

Reduce cyclical equity sector exposure including financials

Increase equity weight to the more defensive sectors including utilities, Reits, consumer staples and telecoms.

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