10-2s Yield Curve Inverts

As we expected, the yield curve (finally) inverted on Friday, closing at -7 basis points, or -.07%. That means the yield on the 2-year U.S. Treasury Bond is higher than the 10-year U.S. Treasury Bond.

It’s also worth noting, as we recap the first quarter below, that fixed income assets, across the spectrum, suffered one of their worst quarters:

Concerning Data on Consumer Spending

Last week, we told you that money flows had shifted to ‘shorter’ term bonds. You can see that in the US 1-3 Month in the table above as the only bond index with a positive return.

Three things that matter:

• Inversion results in recession 6-18 months following true inversion. The clock is ticking now.

• The S&P 500 has rallied +15% following inversion, historically. That would yield a high on the S&P 500 of 5220 from Friday’s close of 4546.

• Consumer spending and corporate earnings will determine if a recession is to occur. Q1 earnings begin next week and will provide guidance.

Traders Reserve Q1 Recap

Investors who were spoiled by two consecutive years of +20% market returns against the backdrop of a global pandemic have been brought back down to earth rather hard in the first quarter of 2022.

Volatility returned as inflation surged to 40-year highs, the Federal Reserve began to raise interest rates and signaled it would raise rates faster than markets anticipated; and Russia surprised the world with a full-scale military invasion of Ukraine, marking the first major military conflict in Europe in decades. 

Those factors fueled a rise in volatility and pushed stocks lower in the first three months of the year. 

As we start the second quarter, investors will need to see incrementally positive progress across geopolitics, monetary policy expectations, and the outlook for inflation if the U.S. economy is to fend off growing fears of recession or stagflation.

It is important to note, however, as we’ll share later, that the U.S. consumer and U.S. businesses are financially HEALTHY. This tells us that consumers and businesses are, for the moment, better able to withstand inflation, interest rates and volatility. For now.

First Quarter Performance Review: 

You’re Going to Put Your Money…Where?

Throughout the first quarter, we heard from many subscribers who quit trading because they were losing money, in the red, worried, nervous, scared.

None of you are alone. But … a moment of honest tough love: where are you going to put your money?

It may surprise you to learn that only 3 sectors provided positive returns for investors in the first quarter.

Three.

Indexes? All in the red
Bonds? All in the red
Money markets? All in the red (due to inflation)

Energy, Commodities and Gold. If you weren’t in those three sectors, you were faced with negative markets everywhere else.

All four major equity indices posted negative returns for the first quarter of 2022, although the S&P 500 and the Dow Industrials saw mild losses compared to the Nasdaq and Russell 2000. Losses were cut from the February/March lows with the late March rally.

Quarterly Returns for Traders Reserve Services

We’re beating every index they can create. Even our little ‘dividend income’ portfolio beat the markets in Q1!

All numbers represent realized income or gains for trades opened and closed during Q1 2022. 

• Options Income Blueprint Income returns assume 3 contracts per trade.

• Income Masters returns assume 5 contracts per trade.

• Triple Play Income is a tracked portfolio of 14 positions at 100 shares or 1 contract per position.

• Income Confidential assumes 100 shares of each stock held and represents dividend income only.

Income Confidential, while counting only dividend income in the table above, this portfolio currently boasts a 13.4% long-term average return per position held (17 total positions), plus 7.6% dividend income generated.

Options Income Blueprint benefitted from a stricter focus during the quarter on core stocks, like Micron, Marvell Technology and others, which removed some volatility from the options selling approach and bought time for positions held from 2021 to begin recovering.

Income Masters performance has been below par due to a need to shift away from high PE, higher beta stocks, which fell out of favor in Q1. Overall trading performance did not meet long-term performance goals in the quarter; however, we expect performance to accelerate in the quarters ahead.

Triple Play Income continues to outperform using a three-pronged approach: combining options selling tactics with dividend collection to average 7% income returns per position.

Tomorrow, we’ll provide a Second Quarter Market Outlook along with our view of where your money will do best.

Hang in there,

John Hutchinson

Traders Reserve