“Given the average lag between inversion and recession is 27 months that would put a recession at the earliest in 2021,” the strategists added, suggesting that it will take many months for sentiment to translate into the real economy.
“Of course history is only a guide and there continue to be risks care of possible trade wars and survey data,” they also warned.
Bond yields have continued to creep higher this year on the back of unwinding stimulus packages from central banks and the belief that inflation is starting to pick up. Equities have also had the occasional rocky patch. The investment firm Brooks Macdonald said Tuesday it would be making changes to its equities portfolio with bond yields continue to trend higher.
Higher interest rates usually hurt the equity market because they represent higher costs for companies and thus less room for investment and dividends. Nonetheless, the investment firm is still more confident on the equity market rather than on the bond market.
“Equities should also benefit from robust earnings growth and technical support provided by share buyback activity,” Brooks Macdonald said in a note.
“Overall we are marginally overweight equities as we continue to favor the asset class relative to fixed income, but we will look to shift our exposure within equity markets as higher yields have various implications for sectoral, geographic, quality and stylistic allocation decisions,” Brooks Macdonald added.
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