Did you know that only 12% of yield curve inversions since 1955 have not resulted in a recession?

What this means is that no indicator is foolproof; it’s wise to look at a variety of signals when making financial decisions.

Today, we’ll look into the following:.

• Cash Is Pouring Out Of Money-Market Funds—What’s Hot Instead: FIrst, investors are moving away from money-market funds to dividend-focused stock funds 💰

• Normalizing Yield Curve—A Reason To Worry? Next, we’ll look into why concerns about the rising 10-year yield might be overblown 🤔

• The Worst-Case Scenario For The Market: Finally, we explore the potential risks for investors in a politically charged market 🗳️

This edition aims to help you stay ahead of the curve in a quickly changing financial environment. Off we go!

P.S. On Thursday and Friday, there will be no newsletter as our esteemed writer Seth Antiles will be celebrating Rosh Hashanah. We thank you for your understanding!

Cash Is Pouring Out Of Money-Market Funds—What’s Hot Instead 💰

The best way to gauge what is hot on Wall Street is to look at the flow of money into and out of exchange-traded funds.

The latest results show that money-market funds have become the equivalent of last week’s takeout: cold and unappealing.

Money-market funds, which invest in short-term, high-quality securities, such as certificates of deposit and government debt maturing in one year or less, saw their first weekly outflow in nine weeks, with a net withdrawal of $7.5 billion for the week ended Wednesday, EPFR data showed Monday.

Investors use these funds to sock away cash as they save for a wedding, a home down payment, or other short-term goals 💵

The change represents a reversal because money-market funds had been the go-to for earning a quick buck on cash since 2022.

The shift coincides with the Federal Reserve’s half percentage-point interest rate cut last week.

The data capture moves investors made ahead of the decision and shortly after.

Expectations are high that more cuts will follow when policymakers meet, in November and December 📅

The latest flight of cash out of money-market funds simply reflects the reality that investors want yields that won’t dwindle overnight—returns that they can count on for the long haul.

Dividend-focused stock funds, for example, had the highest inflow in 24 weeks.

It’s a new era of returns, so investors are adjusting their strategies in favor of opportunities that will perform better for longer.

Normalizing Yield Curve—A Reason To Worry? 🤔

For the last two years, the yield curve has been inverted.

This means that the yield on 2-year treasury bonds have been below the yield on 10-year treasury bonds.

Economists have predicted a recession was a near certainty because throughout history, inverted yield curves have accurately foreshadowed recessions.

But not this time ❌

In fact, in recent weeks the yield curve has normalized, with 2-year yields trading at 3.53% and 10-year yields trading at 3.76%, which is an upward sloping yield curve of 23 basis points—the recession warning over.

But some investors are warning that the rising 10-year yield is cause for concern because it may indicate inflationary pressures due to China’s recent interest rate cut or concerns about US fiscal deficits.

Both worries are unfounded 🤷

The US 10-year yield is low, and far below the 5% seen about a year ago.

The 10-year yield is slightly higher than the 3.65% seen two weeks ago when investors were fretting about recession risks, and the higher yield is most likely a slight adjustment to the likelihood that a recession will be avoided, and a soft landing is on the way.

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The Worst-Case Scenario For The Market 🗳️

For investors, the worst-case scenario is that one party sweeps both the presidency and both congressional chambers.

Under such a scenario, if it's Democratic sweep, the risk is that taxes would go sky high and wreck the economy.

Under a Republican sweep, the risk would be that tax cuts would be so dramatic that fiscal deficits would balloon, sending treasury yields soaring, which would undermine the stock market.

So no matter who wins the presidency, investors should hope it’s not a clean sweep 🙏

Inner Circle Global Macro Update 🔍

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