Election Years With Negative Yield Curves = Recession.

The New York Stock Exchange in Manhattan, NYC.

Election Years With Negative Yield Curves = Recession.
 
The S&P500 is up 15.3% so far in 2024. How will the rest of this election year play out? Will it be more like 2020 (+16.3%) or 2008 (-38.5%)? Emotions run the gamut between AI-mania, and thinking the dollar will become worthless and banks will fail. What does history teach us? What’s our best strategy?
 
Since 2000 (-10.14%) and 2008 were both terrible election years on Wall Street, and the negative yield curve flashed a recession warning in those years (such as is happening today), it’s a good idea for us to pay attention to the economic indicators. Below are the topics we’ll cover in this blog.
 
Election Year Performance
Negative Yield Curve Effect
Market Performance Riding on Just 5 Companies
Real Estate Hitting New Highs
Economic Phantoms Hiding in the Wings
Don’t Fight the Fed
Time-Proven 21st Century Investing Strategies
 
Election Year Performance
As you can see in the chart below, over the 10-year period election years look fine, with 12.9% average annualized gains. However, over the long-term, election and mid-term years are the worst in the 4-year cycle, with a mere 2-3% year-over-year gain. That has a lot to do with the Dot Com and the Great Recessions, when the S&P500 lost -38.49% (2008) and -10.14% (2000). Those two years have a few things in common with this year, including a negative yield curve.

Negative Yield Curve Effect
Below is a chart of the 10-year treasury versus the 2-year. When the line goes negative, that is known as a negative yield curve. It’s important to notice that there is a 100% correlation between negative yield curves and recessions in the chart. Many of those recessions started in an election year – 2000, 2008 and even 2020 (although the pandemic recession was the shortest in history, due to the U.S. handing out $4.2 trillion to every person and corporation with a heartbeat).  

During periods of a negative yield curve, investors are getting paid a higher interest rate on the 2-year treasury than they are on the 10-year. Here’s another chart that reflects that. (We discuss this in greater detail during the “What’s Safe” day of our Financial Freedom Retreat.)

Daily U.S. Treasury Par Yield Curve Rates
June 21, 2024

Source: Treasury.gov

Since banks, insurance companies and pension providers are typically the creditors of long-term debt, and long-term debt can be illiquid and negative-yielding during negative yield curve periods, there is an elevated risk of a recession sparked from the financial services industry. (One was quelled in 2023 by the Federal Reserve Board. Keep reading.) We’ve been on recession watch for the past two years, while it is now hoped that the U.S. will stick the soft landing. There remain areas of concern for the financial services industry, particularly with regard to commercial real estate, which is why we are underweighting U.S. financials in our sample pie charts.
 
Check out my blogs “Uh Oh. More Bank Trouble,” and the “WeWork Bankruptcy” for more information on banks and CRE. If you’re worried that banks will fail en masse or the dollar will become worthless, read, “China and Russia Double Their Gold,” and “BRICS.” There are ways to hedge against another financial meltdown. However, neither the Iraqi dinar, nor the Venezuelan bolivar, nor BRICS are the solutions (as so many infomercials have been promoting).

Market Performance Riding on Just 5 Companies
By now you’ve heard of the spectacular 2023 gains of the Magnificent 7, which have become the Fantastic 5 this year. The Magnificent 7 doubled last year. Without the performance of the Magnificent 7 (which doubled in share price in 2023), the S&P500 gains would have been 9.9% instead of the 26.3% total return. You missed out on these impressive returns if you didn’t have a large cap growth fund or a Breakthrough Technology ETF.

​When we hear of a company like Nvidia soaring over 9-fold in share price since the beginning of 2023, it’s easy to want to jump in and pray for a pot of gold. However, it’s equally important to understand that what flies high can also crash. It’s not that artificial intelligence will become less pervasive. It’s more a question of valuation. As you can see in the price-earnings chart below, the only time when stocks were more expensive than they are today was before the Dot Com Recession. The NASDAQ Composite Index dropped -78% between the high of March 2000 and the low of October 2002. 

​

Source: Nobel Prize winning economist Robert Shiller.

Nvidia’s net profit was just $30 billion in 2023, yet investors are valuing the company at almost $3 trillion. 71 is a very high P/E even for a company that is increasing revenue at 265% year over year.
​
Internet stocks have led market returns over the past year and a half, fulfilling the promise of the New Economy that was touted to investors in 2000 (before the Dot Com Recession). However, the superstars of 2023 and 2024 were some of the worst performers in 2022. The S&P500 dropped -19.44%. Tesla sank -66%, Nvidia lost half, and the NASDAQ Composite Index tumbled -33%.

​

Real Estate Hitting New Highs
The existing home price hit a new high in May, marking a largely unaffordable nationwide mean of $419,300 (source: The National Association of Realtors). According to AttomData, 32.3% of a person’s income is required to purchase a home. (Canadian data shows that the problem is even more severe in Canada, where 60% of income is required to buy.) Similarly, real estate was on fire before the Great Recession, hitting an all-time high for that period in 2006 of $221,900, before sinking to a low of $166,100 in 2011. By 2008, the U.S. was seeing unprecedented rates of foreclosures. Mortgage banks were going bankrupt or being rescued. Over 20 million foreclosures occurred in the Great Recession era.

​

What’s different this time around? Foreclosures are up 56% year over year. However, they remain near historic lows, at less than 1%. That’s largely due to loan modifications, rather than a reflection of housing as a sustainable piece of the family budget (note again the high percentage of one’s income that must now be devoted to housing). As a result of the loan mod process being used routinely in lieu of foreclosure, 2.3 million mortgages are currently severely underwater, even as home prices are at an all-time high. More homeowners staying in their homes, even if they really can’t afford the payment, means fewer homes for sale, which pushes up prices.
 
Delinquencies on CRE mortgages are increasing, with delinquency rates on CRE CLOs up “notably,” according to the Federal Reserve Board’s Financial Stability Report. However, a similar work-through is happening in the CRE market. Rather than sending a company into bankruptcy, a more widespread practice is to lengthen the term of the loan, while tacking on the fees and unpaid interest and principal to an ever ballooning amount due. The relatively low turnover in the commercial real estate market has resulted in prices declining a mere -1.3% in 2023. According to the Financial Stability Report, “These transaction-based price measures likely do not yet fully reflect the deterioration in CRE market prices because, rather than realizing losses, many owners wait for more favorable conditions to put their properties on the market.” The report concluded that “risks on loans backed by CRE properties [remain] elevated, and banks with concentrated exposure to this sector are particularly vulnerable.” We saw that in spades with New York Community Bank – the bank featured in my “Uh Oh” blog.

Economic Phantoms Hiding in the Wings
As we see with the negative yield curve, the market gains concentrated in just five companies, elevated price-earnings ratios in equities, sky-high home prices, and even a commercial real estate market that has yet to price in empty office buildings, there are quite a substantial amount of economic phantoms hiding in the wings. While many Main Street investors might not see these issues in the headlines (that are instead touting new Wall Street highs daily!), we all feel them and witness them in our budgets, our malls, our neighborhoods and even our own brokerage statements (which won’t reflect impressive market gains if we don’t have large cap growth, AI or technology in them). It’s no wonder that our emotions get jacked around between AI euphoria and doomsday predictions.
 
Don’t Fight the Fed
The government saved the day in 2020, preventing what everyone feared could be as bad as the Great Depression. Corporations and individuals alike were given money to get through the pandemic. Some debt was completely forgiven. Others can be paid back slowly over a great deal of time.
 
When banks were failing in 2023, the Federal Reserve Board created a special Bank Term Funding Program where bond paper losses could essentially be marked at par. The BTFP ceased extending new loans on March 11, 2024. TARP stabilized the financial system during the Great Recession.
 
Today, the Feds are encouraging banks to work with delinquent borrowers rather than foreclose or force the corporation into bankruptcy. The consequences of that are stubbornly high home and even CRE prices. With no bankruptcies, foreclosures or bank failures in the headlines, investors are willing to take on greater risks, which is pushing equity prices to all-time highs. The Feds will not want to “weigh in” on the election, and will do their best to keep the economic headlines as benign as possible this year. That doesn’t always work. 2008 is an example (although Bernanke and Paulsen lied about the systemic failure of the financial system for as long as they could). Even with all of the financial engineering going on, which could keep stock and real estate prices high while continuing to balloon the nation’s debt, there is a way to win, while protecting ourselves from losses.  
 
Time-Proven 21st Century Investing Strategies
Doomsday predictions are nothing new. They’ve been around since recorded history. Irrational exuberance on Wall Street tends to end badly for Main Street investors, as evidenced by the Great Depression, the Dot Com Recession and the Great Recession. Two out of those three landmark Wall Street routs were in the 21st Century, which is why it is so important to have a recession-proof plan in place before the about-face happens.
 
Business cycles tend to include periods of recessions. We don’t have the political license to print up $4.2 trillion to prevent the next recession, as we did in the pandemic, when the Debt Ceiling had been suspended. When recession risks are heightened, it’s a good idea to overweight safe – to act a little older than we are. (In today’s world of elevated debt and leverage, we must also know what’s safe in order to protect our wealth from liquidity squeezes and paper losses.) The rather simple process listed below earned gains in the Dot Com and the Great Recessions, and has outperformed the bull markets in between. As I’m fond of saying, this strategy is literally easy-as-a-pie-chart – the life math that we all should have received in high school and college.
 
Recession-Proofing Our Wealth Plan

1. Keep a percentage equal to our age safe,

2. Overweight an additional 10-20% safe before the recession,

3. Diversify our at-risk investments to include large growth (plus mid & small caps, value replacements, and hot industries, including technology and AI), and,

4. Rebalance 1-3 times a year to ensure that we are capturing gains at the high, and adding more at the low.
 
 
Bottom Line
There are ample reasons to be concerned about the economy. The real question is whether or not the Feds can continue to stick the soft landing, or will one of the areas of weakness (CRE?) implode, taking elevated prices and a few financial services companies down with it. Whether we are euphoric, skeptical, ready to become a Prepper, or ready to dive into crypto, a better plan is to:
 

• Underweight risk,
• Lean into time-proven strategies,
• Know what we own and why (rather than having blind faith that someone else is protecting us),
• Add some hot industries (within reason and dollar-cost averaging if the price is elevated),
• Diversify,
• Rebalance,
• Make sure the safe side of our plan is truly protected, and,
• Steer clear of infomercials that scare us into believing there is one cure for everything.

 
We need to fix the roof while the sun is still shining, while stocks and real estate prices are high, rather than hope and pray that we make up losses after the plunge or that our political candidate will save the day. Wisdom and time-proven systems are the cure. The time is now – if history is any accurate predictor of trends.
 


​Join us at our online Oct. 18-20, 2024 Financial Freedom Retreat. Learn how to:

* Invest in hot industries, such as Nvidia and artificial intelligence,
* Hedge against a weaker dollar,
* Invest and compound your gains,
* Green your retirement plan,
* Easy and efficacious nest egg strategies,
* Get hot and diversified (including in artificial intelligence and EVs),
* Evaluate stocks,
* Keep an age-appropriate amount safe, and,
* Know what's safe in a Debt World.

You'll even discover how to save thousands annually with smarter big-ticket choices. Yes, it's a complete money makeover. 
​
Email [email protected] to register. Learn the 15+ things you'll master and read testimonials in the flyer on the home page at NataliePace.com. Register with friends and family to receive the best price. ​

"Ten minutes into the first day I was already much smarter about investing than I ever thought I would be in my life and I knew I was in exactly the right place at this retreat. I am amazed at how EASY and FUN it is to make my money work for me and those I love. I think this kind of information should be compulsory in schools. I wish I'd learned this sooner." CM

If you’d like an unbiased 2nd opinion on your current wealth plan, email [email protected] for pricing and information.

​

Join us for our Online Oct. 18-20, 2024 Financial Freedom Retreat. Email [email protected] or call 310-430-2397 to learn more. Register by June 30, 2024 to receive the best price and a 50-minute private, prosperity coaching session (value $400). Click for testimonials, pricing, hours & details.

Join us for our Restormel Royal Immersive Adventure Retreat. March 7-14, 2025. Email [email protected] to learn more. Click for testimonials, pricing, hours & details. There is very limited availability. Register by August 15, 2024 to ensure that you get the exact room you want. (There may not be an opportunity to register after August 15, 2024.) This retreat includes an all-access pass to all of our online training for a full year for two, and three 50-minute private, prosperity coaching sessions. Much more affordable than you might think. Email [email protected] to learn more.

​Natalie Wynne Pace is an Advocate for Sustainability, Financial Literacy & Women's Empowerment. Natalie is the bestselling author of The Power of 8 Billion: It's Up to Us and is the co-creator of the Earth Gratitude Project. She has been ranked as a No. 1 stock picker, above over 835 A-list pundits, by an independent tracking agency (TipsTraders). Her book The ABCs of Money remained at or near the #1 Investing Basics e-book on Amazon for over 3 years (in its vertical), with over 120,000 downloads and a mean 5-star ranking. The 5th edition of The ABCs of Money and the 2nd edition of Put Your Money Where Your Heart Is are the most recent releases of these books. Follow her on Instagram. 
​​​​​
Natalie Pace's easy as a pie chart nest egg strategies earned gains in the last two recessions and have outperformed the bull markets in between. That is why her Investor Educational Retreats, books and private coaching are enthusiastically recommended by Nobel Prize winning economist Gary S. Becker, TD AMERITRADE chairman Joe Moglia, Kay Koplovitz and many Main Street investors who have transformed their lives using her Thrive Budget and investing strategies. Click to view a video testimonial from Nilo Bolden.​

---

Check out Natalie Pace's Substack podcast on Apple and Spotify.
Watch videoconferences and webinars on Youtube.

Other Blogs of Interest
5 Green Tips for Clean Beaches Week.
Nio Sales Expected to More Than Double in 2Q 2024.
So, You Think You Want to Be a B&B Owner...
Artificial Intelligence and Crypto Scam Alert by the SEC. 
Netflix Evicts Unpaid Viewers. Empty Theaters. 
Retiring Soon? Start Planning Now.
2024 Rebalancing IQ Test. 
Answers to the 2024 Rebalancing IQ Test. 
May is National Bike Month. Paris and Amsterdam are the Stars.
AI, Gold & Copper are on Fire. Sunpower Doubled. 
Sell in May and Go Away? What About the Election?
Vacations that Color Our World Forever.
The Magnificent 7 Drop to the Fantastic 5
9 Inflation, Budgeting, Debt Reduction and Investing Solutions.
China & Russia Double Their Gold Holdings. 
2024 Investment of the Year?
The Reddit IPO. Meme Stock or Snap Land?
Tesla's Factory in Germany Taken Offline by Activists.
Bitcoin Sets a New Record High. The Importance of Rebalancing. 
Beyond Meat's Shares Surge. Quaker Oats' Pesticide Problem.
Stocks are Flying High. Why Aren't Mine?
Cut Your Tax Bill in Half. 9 Tips.
Celebrity Jet CO2. Green Washing. The Facts. Some Solutions.
Copper: Essential to the Clean Energy Transition. 
Uh. Oh. More Bank Trouble.
Are Amazon, Square and Other Tech Companies Ripping Us Off?
Housing. Unaffordable. What Works? Case studies and creative solutions. 
Don't Reach for Yield. Closed-End Funds. 
2024 Investor IQ Test.
Answers to the 2024 Investor IQ Test.
Apple's Woes Drag Down the Dow. 
The Winners & Losers of 2023. Ozempic, Magnificent 7 & Beyond. 
2024 Crystal Ball. 
The Underperforming DJIA, Full of Fossil Fuels and Forever Chemicals.
A Spectacular Year for 3 of the Magnificent 7.
The Best ROI* (Almost 40%!) & 7 Life Hacks That Save Thousands.
Portugal Eliminates Tax Advantages for Ex-Pats.
Earn $50,000 or More in Interest. Safely. Finally. 
WeWork's Bankruptcy. Half-Empty Office Buildings. Problems in our Personal Wealth Plan.
Solutions for Unaffordable Housing.
Cruise Ships Give Freebies to Investors. Should You Take the Bait? Should You Take a Cruise?
Bonds. Banks. The Treacherous Landscape of Keeping Our Money Safe.
7 Rules of Investing
13 Lifestyle Choices to Reduce Waste, Pollution & CO2 & Save a Boatload of Dough.
China Bans Apple
11-Point Green Checklist for Schools.
Artificial Intelligence and Nvidia's Blockbuster Earnings Report
​Biotech in a Post-Pandemic World
10 Wealth Secrets of Billionaires and Royals.
What Happened to Cannabis? 
Bank of America has $100 Billion in Bond Losses (on Paper)
Lithium. Essential to EV Life.
Fiat. Crypto. Gold. BRICS. Real Estate. Alternative Investments.
BRICS Currency. Will the Dollar Become Extinct?
Are There Any Safe, Green Banks?
7 Ways to Stash Your Cash Now. Lessons from the Silicon Valley Bank Failure.
Which Countries Offer the Highest Yield for the Lowest Risk?
Why We Are Underweighting Banks and the Financial Industry.
​Save Thousands Annually With Smarter Energy Choices
Is Your FDIC-Insured Cash Really Safe? 
Money Market Funds, FDIC, SIPC: Are Any of Them Safe? 
My 24-Year-Old is Itching to Buy a Condo. Should I Help Him?
The 12-Step Guide to Successful Investing.
The Bank Bail-in Plan on Your Dime.

Important Disclaimers
Please note: Natalie Pace does not act or operate like a broker. She reports on financial news, and is one of the most trusted sources of financial literacy, education and forensic analysis in the world. Natalie Pace educates and informs individual investors to give investors a competitive edge in their personal decision-making. Any publicly traded companies or funds mentioned by Natalie Pace are not intended to be buy or sell recommendations.

ALWAYS do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies. Investors should NOT be all in on any asset class or individual stocks. Your retirement plan should reflect a diversified strategy, which has been designed with the assistance of a financial professional who is familiar with your goals, risk tolerance, tax needs and more. The "trading" portion of your portfolio should be a very small part of your investment strategy, and the amount of money you invest into individual companies should never be greater than your experience, wisdom, knowledge and patience.  

Information has been obtained from sources believed to be reliable. However, NataliePace.com does not warrant its completeness or accuracy. Opinions constitute our judgment as of the date of this publication and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.