Bern Factor. Weekly Letters

by Mark Bern, CFA If you watch financial network TV or read what financial gurus have to say on the Internet you can expect to hear a lot about the yield curve in the coming months.  The fact is it will have everyone worried about the possibility of another recession.  Why?  In every instance when the yield curve inverted in modern history (since the Great Depression) when the yield curve inverted it was followed by a recession in the U.S. that began sometime between six and 24 months after the inversion occurred.  What is the yield curve?   It is the spread (or difference) between the 10-year Treasury note and the 2-year Treasury note yields (market interest rates).   When the 2-year note yield is higher than the 10-year note yield the curve is said to be inverted.   The reasoning is simple: investors should expect to be paid a higher yield for holding a security that has a longer term to duration because so much can happen over the longer time frame, thereby increasing the as

by Mark Bern, CFA First, let me reiterate that I expect the remainder of 2018 to be stronger than most financial pundits and economists do.  OECD (Organization for Economic Co-operation and Development), an organization of mostly developed countries, projects that GDP will grow at 2.78% for all of 2018.  After the results of quarters 1 & 2, that would require the third and fourth quarter growth to drop to a dismal average of 2.41%.  The folks at The Kiplinger Letter are projecting 2.9% for the full year; not much better.  The Conference Board , which is much more enthusiastic about our nation’s growth potential, forecasts a 3.3% GDP growth for the second half of the year bringing the full year estimate to about 3.2%.  Forecasts are all over the board but most (that I have seen) expect growth below 3%. While I hope the Conference Board is correct, I am not quite as enthusiastic.   My expectation is for growth to drop down to a still respectable 2.8% in quarter three and th

by Mark Bern, CFA Stocks are near record highs.   Over the last few weeks stock prices have been almost flat.   Over the same period, companies have been reporting double-digit earnings increases.   The result is that multiples like the P/E ratio have been contracting bringing stock values down from nose bleed levels closer to the long-term average.   Interest rates are still historically low, justifying higher than normal valuations.   Inflation is heating up a little but not getting out of control.   Economic growth in the U.S. remains strong and wages are beginning to rise at a better clip.   These are all good signs. The trade war worries may be overblown, especially when considering the impact on the average U.S. household may eventually rise to around $300 per year.   Even if the President decides to raise the tariff on all goods coming out of China to 25% instead of 10%, the additional cost to the average American household is likely to be about $600 per year.   For pers