SPX and Energy
April 14, 2022
Opinions are mostly formed by past experience, with elevated inflation on sharply high oil prices causing some investors to dust off their 1970’s investment template. Unfortunately, things are never that simple, and as much as you miss the 1970’s, we need to live and invest in the 2020s. The market climate during the 1970’s was characterized by an extremely flat yield curve. The 2/10 curve inverted two/three weeks ago when Fed expectations reached a hawkish peak (expect the 2/10 curve to invert again soon), but the short-end and real yield curves maintained a steep upward slope and the 5/10 curve inversion (nominal and 1-year forward) came nowhere near inversion levels from the 1970’s. Basically, we haven’t seen anything close to a 1970’s yield curve in the post-Volker era (see Waller’s comment above) and it’s highly unlikely given changes in consumer spending, technological advancements and the Fed’s dual mandate. Of course anything is possible, but we consider a 1970’s-like environment as a ~5 standard deviation tail risk.