Financial Industry Insights from Advisors Asset Management


Contrarian Market Signals: What is Certain about Uncertainty?

Contrary to narratives bombarding the markets right now, certain indicators are historically very bullish for equity assets. Though the anxiety about the flock of “black swans” being right around the corner helps to mitigate over exuberance, it astonishes me how many times we forget the previous prognostications and make new cases for the failed projection. Recently, I have been reflecting on Mark Twain’s quote: I've had a lot of worries in my life, most of which never happened.”

The number one narrative is the inverted yield curve and the forgone conclusion of a recession.

The inversion has borne out historically in a recession. So, while many may argue it’s different this time, it never really is. However, it is important to note that the typical length to a recession is roughly 18 months and with certain features unique to this cycle, one could argue that it may take a bit longer for a recession to occur. As we keep reiterating, we have over $19.6 trillion in assets on the “Four Horseman of the Central Banks Balance Sheets” – The Federal Reserve, The European Central Bank, The Bank of Japan and the People’s Bank of China. This creates a sense that a large buyer for the debt exists and puts pressure on the yields which makes the inversion of the yield curve trigger earlier than where Treasury yields, free of manipulation, would have inverted in the past. This also has led the most unnatural phenomena in modern markets in that we are approaching $17 trillion in negative-yielding debt.

Side note: There was a period when U.S. Treasury Bills were negative for a brief period in 1940 and 1941. The threat and escalation of the World War brought on a brief period of massive risk off.

If we discount the curve may be prematurely triggering, discount the Fed easing interest rates while economy is expanding and extend the time until a recession to, let’s say, 24 months, we still note that the time from when an inversion occurs and the recession starts often generates some of the highest equity returns. In general, the market averages roughly a 15% return in the 18 months following an inversion and higher if one picks the top of the market. However, in our opinion, we should all learn that picking tops and bottoms is without consistent success and a fool’s folly. 

With the yield curve coming down, we now have another rarity: The S&P 500 yield is above the 30-year Treasury. This has only occurred in three months over the last 40 years. Yet, there is a bit more to this story. Jefferey Rubin from Birinyi Associates denotes that the 30-year Treasury did not begin being issued until 1977 and that the longest bond prior to that was the 20-year Treasury. Shifting the analysis from the 30-year to the 20-year gives us an interesting alternative narrative in that the S&P 500 yield was below the longest Treasury yield from 1958 to the brief period in 2008 and recently. According to their analysis, from January 1943 to June 1958, the S&P 500 dividend yield was above the long bond. By our calculations, during this 15-year timeframe, the S&P 500 averaged a 12.90% annualized total return, of which 7.74% was the price return and the remaining return was due to dividends. Those who were able to invest their dividends into the index generated a 16.54% annualized return.

One other indicator that got quite a bit of publicity – but with little context or how it marked a tremendous period of buying into the equity markets – was the U.S. Economic Policy Uncertainty Index which has been published since 1984 by Baker Bloom and Davis. It measures the number of uncertain terms in broad-based periodicals that include various terms regarding a multitude of economic, legislative, central bank and various other regulatory agencies and gives it a scale. Over the weekend – after United States’ tariff retaliation toward China – we hit a level we haven’t seen in three years. It also marked a level that has only occurred 41 times since 1985, or roughly only 0.3% of the time. Some highlights about this metric:

  • 14 of the 41 times occurred on weekends or holidays.

  • 15 of the 42 times occurred during a recession, 36.5% of the time even though we spent roughly 8% of the time in a recession during this entire time. Remember the adage, when the right time comes to buy, you won’t want to.

  • As far as U.S. Presidents are concerned, here are the occurrences: Ronald Reagan: 3, George Bush Sr.: 5, Bill Clinton: 3, George W. Bush: 17, Barack Obama: 12, Donald Trump: 1.

  • The cluster occurred the most following 9/11 when eight spikes happened in two months.

While most would feel that uncertainty in economic policy would spill over into negative equity returns, one may forget that the market already prices in more dire events it is aware of and often does not occur.

In evaluating these 41 moments of excessive spikes in the uncertainty index, 24 were separated by three months or more. As such, we evaluated these periods and what the S&P 500 returned over the next year. The average total return of the S&P 500 during the following 12 months was 17.08% with a median return of 19.78%. Only two periods (8.3% of the time, which matches the amount of time in a recession during this entire period) were negative returns and both occurred while in the throes of a recession (November 2001 (-17.42%) and January 2008 (-35.88%)). This translates to 91.7% of the time in which returns were positive and ranged from a low of 4.72% in 1993 to a high of 47.03% in 2009.

Things are rarely different, but there are nuances. Often the greatest successes lie in looking past the noise and finding the context of the situation where the majority might be misconstruing those facets that are right in the open. With yields on debt being pulled down by the nearly $17 trillion in negative-yielding debt, perhaps diversifying income needs into the neglected value of high dividend-paying sectors of the equity market may have history on its side.


CRN: 2019-0806-7604R

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit


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