The American economist community was all atwitter last week about the inverting yield curve. They even discussed it on Twitter.
The question advisors asked themselves last week was threefold:
- Do investors know what the inverted yield curve is?
- Do investors understand the implications of the inverted yield curve?
- Do investors care about the implications of the inverted yield curve?
This is an important consideration for advisors, who must decide whether they need to alert all of their clients about the meaning of the complicated economic concept. It is a question that frequently comes up for advisors whenever economic news breaks.
When is it appropriate to send out an all-points bulletin?
In December, the Dow Jones Industrial Average lost 4,000 points, which was more than 15 percent of its value, falling from the 26,000 range into the 22,000 range. Spectrem surveyed investors in January to find out if they received contact from their advisor during that tumultuous time, and 64 percent said they did. Most of those who were contacted said their advisor told them not to panic.
But of those who did not hear from their advisor in December of 2018, 84 percent said they were not disappointed because their advisor did not contact them.
Advisors simply are not completely certain when to contact investors and when to wait to hear from them.
Here is a question: In an advisor’s daily routine, which happens more often – an advisor contacting clients, or clients contacting the advisor? In the case of the inverted yield curve announcement, which happened more often: a worried investor calling an advisor for an understanding of what it all means, or an advisor contacting investors to let them know not to panic?
On a daily basis, financial advisors hear or read news that could impact the portfolio of their clients. Sometimes the news is impactful but not earth-shattering, and sometimes the news is open to interpretation.
Advisors must weigh the consequences of the news event and determine whether clients need to be advised as to the effect it will have on portfolio performance. They must determine whether a phone call, e-mail or text will be appreciated by the client, or whether it will unnecessarily alarm the client.
The inverted yield curve moment is the perfect example of the internal negotiation which advisors face when financial or economic news breaks.
The inverted yield curve, when the yield on three-month Treasury bills exceeds the yield on 10-year Treasury bills, is a rare occurrence, and should not happen if the economy is operating according to accepted norms. It is considered an indication that the economy’s growth rate is slowing down precipitously.
But, more importantly, the inverted yield curve is seen as a clear indicator of an impending recession. According to economists, the last nine times the yield curve inverted over the past 65 years, a recession of some degree occurred. The inverted yield curve preceded the recessions which occurred in 2000 and in 2008.
However, the recession which follows an inverted yield curve often does not occur until one year later. It is not an immediate reaction, at least from an economic standpoint. It is also noteworthy that by Tuesday of this week (March 26), the bond yield reverted to its accepted rates, and the inverted yield curve emergency was averted.
In today’s 24/7 news cycle, the impact of the inverted yield curve could be exacerbated by the fact that more investors hear about it and want to know if they need to protect themselves against the upcoming and apparently dead certain recession.
It falls upon advisors to determine whether they need to contact their investors to let them know what they think about the impact of the inverted yield curve, and whether action needs to be taken.
And advisors have to consider the individual client. Some knowledgeable clients understand the meaning behind an inverted yield curve. For some investors, an advisor would need to explain all three words: “inverted”, “yield” and “curve”.
Which one of those clients needs to be contacted? Which of those clients is likely to contact the advisor?
Perhaps clients should come with complete communication instructions attached.
©2019 Spectrem Group