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Hitting the headlines this week is the news that the yield curve in the United States has now hit its deepest inversion since 1981, marking the start of a recession that lasted until November 1982. It is also the most America’s worst recession since the Great Depression.
The Federal Reserve in the south continues to try and beat high inflation, with many expecting that another rate hike could be headed the way of the American people.
But what, if anything, does this mean for Canadian investors?
But first, what is the yield curve?
The yield curve tracks the return on United States treasury securities. As returns increase, bond yields decrease in response. So, typically, you’ll see the yield curve slope up, with bond yields going down.
The yield curve inverts when there is higher inflation, higher interest rates, and more economic activity. When the yield curve inverts IT hard, it usually shows that investors expect not only more interest rate hikes soon but also higher borrowing costs.
The big thing to note about inverted yield curves is that they usually come before a recession. So, as we get closer to when the Fed will announce whether or not there will be an interest rate hike in July, the yield curve continues to shift, as investors brace for higher rates.
What this means for Canadians
If a recession hits the United States, chances are Canada will have been in one before. That’s true, because Canadians are going through huge amounts of borrowing during the pandemic when the housing market is on fire.
So, with declining national consumption, falling commodity prices, and weakening US demand, things are not looking good for Canadians these days. And similar to the US, the Bank of Canada and the Fed are both targeting inflation of 2%. With inflation currently at 4.05% in the US and 3.4% in Canada, there is still a long way to go.
Why now might be a good time to consider long-term restraints
Here is the important part to remember. Recessions are scary, but they certainly don’t last forever. While investors may see stocks fall in the short term, with costs ranging from inflation to high-end interest rates, in the long term, you’ll continue to see your stronger stocks going up.
In fact, it might be a good time to get into Canadian stocks with exposure to the United States. Why? Because US stocks tend to return faster than Canadian stocks. And two that can also provide protection like valuable stocks Brookfield Infrastructure Partners (TSX:BIP.UN) and Teck Resources (TSX:TECK.B).
Brookfield invests in infrastructure assets around the world, giving investors global exposure. In addition, it invests in the infrastructure that makes up our daily lives. From energy production to roads and utilities, these are essential services that exist regardless.
As for the Teck stock, it also offers essentials, but through basic materials. The world still needs things like copper for sugarcane, coal for iron, and fertilizers for plants. And again, with these different fundamental materials, Canadians can get access to security by investing in this stock as well.
Bottom line
As always, consult a financial advisor before making any investment decisions. They can help you understand your own finances and what you need to use in terms of an emergency fund. That way, if we hit a recession and funds are needed, you won’t have to dip into your long-term investments. And those investments can provide you with protection and growth for years and even decades to come.