Yield curve is ‘a terrible, terrible sell signal’: strategist

Invesco Chief Global Market Strategist Kristina Hooper joins Yahoo Finance Live to discuss using the yield curve as a long-term recession indicator amid Russia-Ukraine influenced market volatility, and how consumers are dealing with inflation.

Video Transcript

- Welcome back. Just about 45 minutes to close. All the markets in the green, led by the tech-heavy NASDAQ, up 1.8%. Yet, parts of the yield curve beginning to invert and flatten. What does all this mean? Can the markets continue to shrug it off? Let's talk to Kristina Hooper, who is the Invesco Chief Global Market Strategist. Kristina, nice to see you. So the yield curve has long been a pretty solid indicator of a coming recession. Is that no longer the case? KRISTINA HOOPER: Well, it is still a pretty accurate indicator if we go back and look at history. But I have to give you a few caveats. First of all, it needs to invert for some time, typically three months, to be a very accurate indicator. Second, it's a longer term indicator. So usually after the yield curve inverts, it takes about 18 months, on average, for a recession to occur. And it is a terrible, terrible sell signal because, typically, stocks have room to run and do run significantly higher after a yield curve inverts. Also, one other thing, the 2s and 10s yield curve inverted, but there are other parts of the yield curve that haven't and they are actually pretty wide, like the three-month, 10-year spread. - So, then, Kristina, why aren't we seeing US stock volatility decreasing a little bit more? KRISTINA HOOPER: I'm sorry? Why are we seeing US stocks-- - US stock volatility decreasing more? KRISTINA HOOPER: Well, I think that investors have become comfortable with both headwinds that are currently facing the economy and markets. In other words, the Fed getting more aggressive in terms of tightening and, of course, Russia's invasion of Ukraine. That was a real shock to investors. Recall, it wasn't anticipated by most. And so that came as a very big surprise. And of course, the Fed's pivot to a more hawkish stance came as something of a surprise. So investors are getting acclimated to both. And I think that explains why we've seen volatility go down significantly. BRAD SMITH: What about how consumers are needing to get acclimated to prices in comparison to last year that are higher, wages that may not have kept pace with inflation, and even some of going further into the price impact, the sticker shock at the pump, and how that may be also a headwind that's impacting other purchases that they make more regularly-- how does that impact some of the broader projections that we've seen even the Fed layout for GDP growth for the rest of this year? KRISTINA HOOPER: Well, I should start by saying that it is a bigger issue for consumers than it is for investors. It is, of course, very, very painful for consumers. But if you're an investor, you're looking at what has historically performed well in higher inflation environments. When you still have a solid economic environment, yes, we're experiencing decelerating growth. But we're nowhere near a stagflationary environment. And that suggests that areas of the stock market and stocks in general could perform well. So that, to me, is what investors are focused on is, where do I go in this inflationary environment? And are there opportunities? I would argue there are, especially after we've seen a significant pullback in stocks. So prices there are more attractive than they were a few months ago. - Speaking of inflation, the University of Michigan Consumer Sentiment at its lowest level since 2011. Its year ahead inflation expectation 5.4%, the highest since 1981. What does that foretell? KRISTINA HOOPER: That tells us that consumers are very concerned about inflation and it is weighing down on consumer sentiment. But if we were to look at the five-year ahead inflation expectations, they tell a different story. They haven't gone up significantly in the last month. In fact, they've stayed stable. Now, certainly at elevated levels of 3%, but still stable. And that suggests that this is a shorter term problem for consumers as opposed to a longer term problem. And we are seeing consumers adapt. In other words, they are not, as we saw in the 1970s, continuing to buy goods expecting prices to go up and, of course, contributing to increase in prices. What we're seeing is for some big ticket items, consumers that can are delaying purchases, because they anticipate inflationary conditions to be relatively short-term-- short to medium term. - Now, something that may cause an issue, as we're seeing this rise in the BA2 subvariant of COVID-19-- we've already seen that that's caused some shutdowns in parts of China. Considering how much trade the two countries do together, then, how should, perhaps, either retail investors or consumers be bracing for this and the potential impact that might have on inflation? KRISTINA HOOPER: Well, certainly, we should, as investors, be paying very close attention to this. There already have been a number of shutdowns in cities in China. And thus far, supply chains and the manufacturing function have been pretty manageable. So I'm making the assumption that that's likely to continue. But we want to follow that closely. The upside, though, is that because of these shutdowns, there is an anticipation that we will see less of a demand in oil, which has caused a slight decrease in oil prices, which is a positive, of course, in this very pressured environment when it comes to oil prices. BRAD SMITH: Just very briefly, Kristina, as we continue to evaluate companies that have placed so much of their growth strategy internationally and on some of the globalized alliances that have come forward-- some of those certainly coming in focus amid international conflict, amid rising oil prices. How would you be evaluating companies that do have many of their ambitions placed on some of the international regions that they've entered into for growth? KRISTINA HOOPER: Well, they certainly could be experiencing some kind of negative overhang because we've taken a step back in terms of globalization in the shorter run. But that could spell a buying opportunity just because I do believe that globalization is far from dead-- in fact, that we will continue on the March towards greater globalization. This is something of a very temporary setback. So from my vantage point, I would anticipate those companies that have been punished as a result of this could provide long-term opportunity. BRAD SMITH: Kristina, it's always great to get your insights. Thanks so much for joining us here on Yahoo Finance today. Kristina Hooper, who is the Invesco Chief Global Market Strategist joining us this afternoon. And, everyone, we're talking home prices as the S&P CoreLogic Case-Shiller National Home Price Index recorded 19.2% annual gain in January, up from 18.9% in December. We're going to break down the significance of the price growth acceleration on the other side.