How Yield Curve Inversion can Impact Your Bank Account

Apr 03, 2022 | Is there a recession on the way?

Weekly Newsletter - Week of 4.03.2022

Stocks Soar, but Could a Recession Be on the Way?

Stocks have been hot as of late, but last week the gains began to slow. As we begin a new quarter of trading, investors have been enjoying a nice rally as of late. The gains have been coming as interest rates are jumping higher and rising concerns in the bond market may be pointing to a Recession on the way.

A New Quarter for Trading

The Nasdaq and the S&P both notched small gains this week despite late selling to close the week. Stocks were flying high to start the week, but rising interest rates may already be slowing the excitement within the market. Stocks notched gains on Friday to start the second quarter of the FY on a positive note. This comes immediately following Wall Street's first negative quarter in nearly 2 years. Despite the poor quarter, the ongoing war in Ukraine, and soaring gas prices, there have been reasons for positive market sentiment as of late.

Gas prices were able to tick down slightly back under the massive $100 a barrel threshold, as President Biden has pledged to release more strategic oil from its reserves. The ongoing war sent a massive disruptor to the global supply, as Russia has always been a key distributor within the oil space. Many investors have been worried that the rise in gas could put a cap on economic growth for 2022.

Job Data

Investors should also be tracking the latest jobs report for March. The U.S. economy added 431,000 jobs last month, well below estimates that predicated nearly 500,000 new jobs. Lower than expected job growth is just another underlying indicator, potentially pointing to an impending recession. While lower than expected, vacancies have been getting filled, and wage growth has also been on the rise as inflation is making every dollar cost a little more.

Inversion Signals

This week, investors were also forced to deal with the dreaded 'inversion signal' when the 2 year and 10 year Treasury Yields inverted Thursday evening into Friday morning, for the first time since 2019. This 'rate curve' indicates that the 2-year note is now higher than the 10 year. An inversion signal has historically been used as a key indicator that an economic downturn may be on the way. The 2 year and 10 year have not inverted like this since the very early days of the global pandemic began to show significant warning signs in late 2019. Economists believe that when the curve inverts, there is a better than two- thirds chance of a recession happening at some point within the next year. The likelihood of a recession jumps up nearly 98% when assessing its likelihood over the next two years.

Another key to know when reviewing inverted curve signals, these may indicate a possible recession, but they do not provide indicators of when that could happen. History has shown that it may take well over a year before this inversion shows significant impacts, but it's a key data point to monitor over the next several quarters.

What It Means: Stocks are coming out of one of their worst quarters in two years. Despite the slumping quarter, stocks have been red hot after bottoming out. While investors seem to have come to grips with the impacts of the ongoing war, the rise in interest rates could be the biggest story within the stock market for the remainder of 2022.

This week we saw the 2 year Treasury yield actually surpass the 10 year, representing the dreaded ‘inversion curve’. This inversion has historically been a key indicator of a future recession. While no timetable is given for a possible recession, investors should be very aware of the underlying economic impacts of rising rates on 2022’s overall economic growth.

This Week’s Picks

EDR (Endeavor)

August 14, 2022

Entry Price:

24.50

Stop Price:

23.35

Target Price:

26.46

Time Frame:

3 Week Hold

EDR has been in a channel pattern over the last few weeks. As it approaches the bottom band, after a some mid-week volatility, look to make enter the trade off the rebound. As noted in KMX, keep a trailing stop loss and close the position quickly should the market turn.

KMX (Carmax)

August 14, 2022

Entry Price:

101.85

Stop Price:

96.45

Target Price:

109.15

Time Frame:

4 Week Hold

KMX, along with most of the market, has been rebounding off June lows. We've seen strong momentum and a crossover of our long-term MAs. Watch for a market pull-back and keep a trailing stop loss. We're riding strong tailwinds, so get in and out quickly

A Labor Shortage for Pilots Pushes Airfare Higher

As the world attempts to finally close the book on massive pandemic fears, demand for things like airfare have been jumping at a massive rate. Airlines have had a rough couple of years as the pandemic essentially eliminated business travel, flying, and airfare. Now, airlines are feeling the effects of the ongoing war as gas prices have seemingly never been higher. But that's not all that's working against airlines... as consumers demand to get back to 'normal' and start traveling again, airlines are having a difficult time staffing enough pilots to complete their travel assignments.

Fewer available pilots mean less overall travel. When there are fewer available flights, the price of an airline ticket is sure to increase. Limited supply and increased demand will always equal additional costs for you, the consumer.

Pilot Shortage

Economists are predicting a shortage of nearly 14,000 pilots by 2024. When you expand that view out even further, the outlook looks even more concerning. If / when that inflection point happens, airlines may be forced to cancel additional
flights as they are unable to keep up with demand. We've already begun to see some airlines cut back on their total number of flights, due to limited availability from their staff.

A large retirement wave began to hit major airlines about 15 years ago when pilots were forced to retire at age 60. The Federal Aviation Administration realized the problem this was causing and bumped that age back to 65. While
providing some immediate relief, there is a growing concern that pilots are no longer an in-demand career field. Without a real plan to grow and groom the next wave of airline pilots, Covid sent the industry into a tailwind. Now, it appears we have too few flights just as the interest in travel is as high as it’s ever been, thanks to the pandemic.

Addressing the Problem

Today, pilots are being paid higher than ever before to help incentivize the new wave of future pilots. Additionally, some major airlines such as United have even opened up their own flight school to attract and retain new talent. Many airlines have also begun to expand their programs at universities, but that process will take years before benefits are realized. Additional programs are also being implemented to drum-up interest from wider and more diverse backgrounds.

What it Means:
Currently, airlines are struggling to fill their vacancies caused by retiring pilots. With gas prices soaring, airline tickets have been increasing for months. While gas prices may be seen as a short-term headwind, the airline industry is bracing for a wave of retirements over the coming years. This will absolutely have a lasting impact on airlines and the price of travel. This could also have a lasting impact on smaller airports and smaller airlines, as travel could eventually be limited due to the scarcity of qualified and experienced pilots.

Senator Warren Calls for Digital Banking & Currency

Crypto regulation has been one of our key themes to watch at the Swing Trading Club. We’ve reported extensively about new bills and proposals that are constantly being discussed, centered around how to regulate the crypto space. This week, Sen. Elizabeth Warren made a bold declaration when she called on the U.S to create a CBDC or central bank digital currency. Senator Warren proclaimed “there’s a lot that’s wrong with our banks, and a central digital bank could improve on a lot of those issues. I think it’s time.” This comes after Ms. Warren recently proposed a new bill, that would block sanctioned companies from doing business with cryptocurrency companies. We’ll be watching closely to see if this new proposal has any imminent effects on the crypto market.

Upcoming Economic Reports

Market Performance- Week of 08.14.2022

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Weekly Watchlists

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Weekly Review

Market Performance- Week of 08.14.2022

Recent Winners

CF (CF Industries)

CF (CF Industries)

Entry Price:

87.40

August 14, 2022

Price at High:

105.10

Return for Members:

16.84%

Timeline:

4 Week Hold

CF is a manufacturer of fertilizer and other farming products. Similar to our thesis on oil last week, we're expecting more global tensions to arise over the coming months. Although not directly related, CF should appreciate if adverse events occur. Technically speaking, we're seeing a bounce off the 180MA. However, there is negative momentum so be careful with entering too early.

MRNA (Moderna)

MRNA (Moderna)

Entry Price:

168.85

August 7, 2022

Price at High:

197.33

Return for Members:

16.86%

Timeline:

1 Week Hold

We're starting to see a reversal take place. Watching the 50 day moving average cross over the 100 day. Saw some weakness to close this week, so wait for upward momentum before jumping in.

X (US Steel)

X (US Steel)

Entry Price:

20.15

July 31, 2022

Price at High:

23.75

Return for Members:

17.86%

Timeline:

1 Week Hold

Stark momentum shift from the lows on this one. Tracking our moving averages on the 2-hour time chart. Looking for an early entry and quick trade.

Recent Watchlist Winners

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