15^thJuly 2019 – Richard Lawrence -Senior Vice President, Portfolio Management

For those of you who know little about ice hockey, Wayne Gretzky is widely regarded as the greatest player in the sport’s history. Part of what made him successful was his intuition and anticipation of the game—he saw things that others didn’t see, or at least he saw them earlier. One of his most famous quotes is about skating to where the puck is going to be, not to where it’s been. This has become one of the most overused phrases in the business world, but I’m going to use it anyway as it really does speak to the core of our investment philosophy; we spend more time thinking about what the world might look like six to 12 months out than what it looks like today. We are trying to anticipate what may change in the global economy over that time which could lead to strong performance in our investment portfolios. The emphasis on foresight is particularly salient right now as we field questions about the state of the U.S. and global economies.

As we sit here at mid-year with the Treasury yield curve inverted, some investors are concerned about the signal value of this phenomenon—and with good cause. As Chart 1 shows, the risk of a recession has risen considerably according to the New York Federal Reserve Bank Recession Probability Indicator, which uses the yield curve slope as a primary input. Other than once in the mid-60s, every time this indicator has exceeded a 30% probability, a recession has occurred.