Hitting the headlines this week is news that the United States yield curve has now hit the deepest inversion since 1981, which marked the beginning of a recession that lasted until November 1982. It was also the worst recession America had since the Great Depression.
The Federal Reserve down south continues to try and beat back high inflation, with many expecting that another rate hike could be headed the way of Americans.
But what, if anything, does this mean for Canadian investors?
But first, what’s a yield curve?
The yield curve tracks the return on treasury securities in the United States. As returns increase, the bond yield decreases in response. So, typically, you’ll see the yield curve slope up, with bond yields going down.
A yield curve inverts when there is higher inflation, higher interest rates, and more economic activity. When the yield curve inverts this steeply, it usually indicates that investors are expecting not just more interest rate hikes soon but also higher borrowing costs.
The big thing to note about inverted yield curves is that they usually come right before a recession. So, as we edge nearer to when the Fed will likely announce whether there will be an increased interest rate in July or not, the yield curve continues to invert, as investors plan for higher rates.
What this means for Canadians
If a recession comes down in the United States, it’s likely Canada will already be in one by then. That’s particularly true, as Canadians went through enormous amounts of borrowing during the pandemic when the housing market was on fire.
So, with national consumption down, commodity prices dropping, and demand in the U.S. weakening, it’s not looking good for Canadians these days. And similar to the U.S., the Bank of Canada and the Fed are both aiming for inflation of 2%. With inflation now at 4.05% in the U.S. and 3.4% in Canada, there is still a long way to go.
Why now might be a good time to consider long-term holds
Here’s the important part to remember. Recessions are scary, but they certainly don’t last forever. While investors may see stocks drop in the short term, with costs from inflation to interest rates on the high end, in the long term, you’ll continue to see your stronger stocks climb.
In fact, it might be a good time to get in on Canadian stocks that have exposure to the United States. Why? Because the U.S. tends to come back far faster than Canadian stocks. And two that could also provide protection as essential stocks are Brookfield Infrastructure Partners (TSX: BIP.UN) and Teck Resources (TSX: TECK.B).
Brookfield invests in infrastructure properties around the world, providing investors with global exposure. What’s more, it invests in the infrastructure that makes up our daily lives. From energy production to roads and utilities, these are essential services that will be around no matter what.
As for Teck stock, it also offers essentials, but through basic materials. The world still needs items such as copper for plumbing, coal for steel, and fertilizers for crops. And again, with this diverse range of basic materials, Canadians can gain access to security by investing in this stock as well.
Bottom line
As always, speak with a financial advisor before making investment decisions. They can help you understand your own finances and what you should have on hand in terms of an emergency fund. That way, if we hit a recession and the funds are needed, you won’t need to dip into your long-term investments. And those investments could provide you with protection and growth for years and even decades to come.
