Question

On Dec. 03 2018 the U.S. Treasury yield curve just inverted for the first time in more than a decade. The spread between 3- and 5-year yields fell to negative 1.4 basis points on that day, dropping below zero for the first time since 2007. Suppose that you have been retained by Fidelity as an investment analyst and are now asked to suggest investment assets to your major millionaire clients (Adam Sandler, Jay-Z, David Muir, Anderson Cooper, Aaron Judge, etc. ) by your head. Generally, your head would like to pick assets from five types of investment assets such stocks, bonds, commodities (e.g. oil, gold, silver, corn, sugar, coffee, etc.), real estate (e.g. residential houses, commercial buildings, etc.), and cash or cash equivalent. Based on your market insights and ability of analyzing economic indicators, which assets would be good for your clients investment? Why do you suggest so?

Answer 1

When the United State Treasury yield curve has inverted, it would mean that there is an expectation of impending recession because yield curve version is directly to be connected with expectation of recession because when the short term Bond yields are greater than the long term Bond yields then it will be represented on the market sentiments that investors are believing that there would be a lower growth rate in the coming years so they are providing a lower bond yield and hence it is be a reflection of of an impending recession so I would be trying to take positions in defensive stocks accordingly.

Common stocks will not be the preferred bet around these times because those stocks who are having a high beta & from highly aggressive industry are not be preferred, whereas the stocks were having a low beta, will be having a higher chance to be selected into the portfolio.

I would be looking for investing into bonds because Bond should be providing me with a good level of security and protection of my money as well as there would be a defensiveness during such time so I would be trying to take position into bronze whether it would be corporate bonds and treasury bonds and I would also be like to look for optimum exposure to gold and silver also because these commodities are alternative asset investments and there would be a recession in to the economy.

I would be trying to select these assets because these assets will be providing me with the defensive exposure and they will be providing me with a healthy rate of return during such volatile time.