An Investor’s View on Fed Policy Moves and Yield Curve Inversions

By Brian Haughey

Inverted yield curves can precede a recession, and negative interest rates remove a traditional income source for risk-averse investors. Do you need to take action? Brian Haughey begins by providing answers to basic questions including:

• What is a yield curve?
• Why does it invert?
• Is it a sign of impending recession?
• What do negative interest rates mean?

Haughey then explains possible effects on investor portfolios and the steps investors can take to protect their portfolios. He goes over allocation strategies for buy-and-hold investors, retirees and fixed-income investors.

By Robert R. Johnson

It’s hard not to become fixated on the actions of what was at one time a very obscure body, the Federal Reserve Board of Governors. But what exactly is the effect on the stock market when the Fed cuts or raises interest rates? This article from the AAII Journal archives provides some perspective by looking at the empirical evidence.

Professors Robert R. Johnson, Gerald R. Jensen and Luis Garcia-Feijoo summarize how stocks—particularly small-cap stocks—have performed during different Fed interest rate environments. Of course, the market may not perform exactly as it has in the past with respect to Fed policy. But, as the saying often attributed to Mark Twain goes, “History doesn’t repeat itself, but it does rhyme.”

The article gives valuable, and timeless, information for investors to consider when formulating an investment strategy or considering potential tactical asset allocation adjustments in response to changes in Fed monetary policy.