TLT: Positioned for growth amid Fed rate cuts and recession risks

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I think we are entering a critical phase of the business cycle where the warning signs are becoming harder to ignore. Despite efforts by central banks to boost growth through rate cuts, domestic sentiment and key economic indicators suggest the market could be in for a significant downturn. As we look at trends in credit card delinquency, job openings and the yield curve, the risk of a future recession looks more pronounced than ever.

Rate cuts are usually meant to boost economic growth. However, the feeling inside points to the opposite direction, company executives lost confidence in their own businesses. Rising credit card delinquencies and declining personal savings reflect financial stress among consumers. Moreover, job openings are falling sharply, signaling a potential slowdown in the labor market, while the yield curve is adjusting in ways that historically predict recessions.

Fed pivot

After each major interest rate pivot, a recession followed. This pattern is seen in several key periods: the early 1990s, the early 2000s, and after the financial crisis of 2008. Each of these periods saw sharp interest rate cuts after a peak that coincided with economic recessions. The trend suggests that such rate swings, intended to stimulate the economy, often occur in response to deeper underlying economic problems, ultimately leading to recessions.

The feeling inside

This graph shows a recent sharp decline in insider buying activity, hitting the lowest level in at least a decade. Company executives and directors are hesitant to invest in their own stock. This cautious stance could indicate concerns about near-term economic conditions or doubts about the positive impact of the anticipated interest rate cut.

Consumer’s growing pains

This graph illustrates a sudden increase in credit card delinquencies, hitting serial highs in multiple timeframes. The chart tracks the share of credit card balances that are delinquent, categorized as 30+, 60+ and 90+ days delinquent. All three categories show a steep upward trajectory from 2021 to 2024, with the 30+ day delinquency rate increasing most dramatically. This alarming trend suggests significant financial stress among consumers, potentially pointing to broader economic distress. Rising delinquency rates may reflect challenges in debt management amid high interest rates, inflation or other economic pressures. Such widespread consumer struggles could have implications for overall economic health.

Labor market weakness

In August, the jobs report showed nonfarm payrolls rose by 142,000, which was less than the 161,000 expected. The unemployment rate fell to 4.2%, but the broader “real” jobless rate rose to 7.9%, the highest since October 2021. There was an increase in part-time jobs by 527,000, in while full-time positions fell by 438,000.

This slower job growth, along with downward revisions for June and July, puts pressure on the Federal Reserve to consider cutting rates at its September meeting. With the loss of 24,000 manufacturing jobs and easing inflation, the Fed may take action, who can benefit NASDAQ:TLT as investors move to safer assets.

Normalization of the yield curve

The inversion of the US yield curve with 10-year Treasury yields surpassing 2-year yields for only the second time since 2022. This shift is being driven by weaker-than-expected jobs data, fueling market expectations for aggressive interest rate cuts by the Federal Reserve. Historically, such movements in the yield curve often precede significant economic changes.

Fed rate cuts vs. Bitcoin

Dramatic Bitcoin price movements during past Federal Reserve rate cut cycles. It presents two significant periods: one with a 41.56% decline and another with a steeper 54.44% decline during the COVID-19 “black swan” event. As we approach the September 18 rate cut, this historical pattern implies potential initial volatility for Bitcoin.

Financial health of US consumers

A disturbing gap between increasing consumer credit card debt and decreasing personal savings in the United States. Credit card debt has reached alarming levels, now 28% higher than its peak in 2008, while personal savings have fallen 8% below previous levels. This rising inequality signals growing financial vulnerability among consumers, with greater reliance on credit and a reduced ability to cope with economic shocks.

ISM Manufacturing Purchasing Managers’ Index (PMI)

A persistent one downward trend in ISM Manufacturing PMI, with the index remaining below the crucial 50-point expansion/contraction threshold. The latest August 2024 reading of 47.2 is underperforming both forecasts and previous numbers, indicating a growing contraction in manufacturing activity.

This indicator was below the normal level of 50 for a year and a half now and is nearing the key recession indicator level of 45. A sustained period below 50 suggests a contraction in the manufacturing sector, often a precursor to a broader economic slowdown.

The risk of recession

This table provides insight into the likelihood of a recession following a yield curve inversion. According to these calculations, the probability of a recession in the next 30 months it is quite large.

Fast vs. Slow Fed rate cuts

S&P 500 performance during various rate cut cycles, classifying them into fast, slow and non-cycles. A fast cycle involves at least five rate cuts in a year, while a slow cycle has fewer than five and a non-cycle consists of only one cut. Data provided by Charles Schwab shows that rapid rate cut cycles result in significantly larger cuts for the S&P 500.

In the first six months after an initial rate cut, the average maximum cut during fast cycles was about twice as large as during slow cycles. Over 12 months, the gap has widened further, with declines in fast cycles averaging 20.7% compared to just 7.4% in slow cycles.

TLT performance during rate cuts

2007-2008 financial crisis: As the Fed aggressively cut rates in response to the crisis, TLT posted impressive gains. From September 2007 to December 2008, while the S&P 500 fell about 40%, TLT rose more than 30%.

Rate reductions for 2019: When the Fed cut rates three times in 2019, TLT gained about 14% over the year and about 18% over the next 2020.

Conclusion

The signs of an impending economic recession are becoming increasingly difficult to ignore. Domestic sentiment shows a lack of confidence, rising credit card delinquencies, a sharp drop in job openings and worrisome movements in the yield curve. The market is showing warning signs of a potential recession. Historically, Fed rate cuts have not only failed to prevent recessions, but have often followed them, increasing risks.

I believe that in times of economic uncertainty, TLT can be a strong choice. Its historical performance during rate cut cycles, particularly during the 2007-2008 financial crisis and the 2019 rate cuts, shows that TLT tends to gain in value as the market can take dips. As we anticipate rate cuts, TLT could once again be a reliable hedge against stock market volatility and economic instability.