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A guaranteed recession

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By Michael O’Connor

The bond market has shot back into focus in recent weeks.

For the last 40 years, it has been home to one of the most impressive bull runs in history.

The disinflationary period from the early 1980s saw the structural decline of interest rates. Bizarrely, US Treasury Bonds were offering 16% a year back in 1980, a far cry from the pennies on offer today.

Over the intervening years, continuous interest rate cuts were needed to facilitate GDP growth, but as rates approached zero, the central banks' weapon of choice ran out of ammo. Interest rates are now rising again as inflation persists.

The 10-year treasury has gone from a low of 0.5% in the summer of 2020 to 2.4% as of the end of March.

As the four-decade bull run comes to an end, what's next?

Is the negative correlation between equities and bonds, the cornerstone of a diversified portfolio, now officially dead?

Is a recession imminent?

Recession Rumours

If historical indicators are to be believed, then a recession is on the horizon. At the end of Q1, we saw multiple yield curve inversion, reigniting debates about an imminent recession.

Yield curve inversions between 2- and 10-year bonds have long been regarded as a solid indicator of a recession in the next 12 to 24 months.

In simple terms, a yield curve inversion occurs when the interest rate paid on short-term debt is higher than the interest rate paid on long-term debt of the same quality.

In a healthy economy, the yield curve should be upward sloping (longer-term rates higher than short-term rates). Logically this makes sense as investors seek higher returns as a reward for the greater uncertainty that comes with investing over longer periods.

When short-term interest rates exceed long-term rates, market sentiment suggests that the long-term outlook is poor, and the yields offered by long-term fixed income will continue to fall.

But like everything, it's not quite that simple.

Since 1978 there have been six inversions of the yield curve.

While the above data shows yield curve inversions have accurately predicted recessions in the past, not all instances of yield curve inversions have resulted in recessions.

The 2- and 10-year yield curve has inverted 28 times since 1900, and in 22 of those instances, a recession has followed.

While an indicator that accurately predicts a recession over 75% of the time shouldn't be ignored, some material changes in recent years need to be considered.

Firstly, the Fed's manipulation of the yield curve has been well documented. I will stop short of saying this time is different, but the Feds intervention in the bond market over the prior decade suggests that a yield curve inversion may not be as valuable an indicator as it once was.

For example, we saw a yield curve inversion in August 2019, yet US stocks are up almost 70% since then. A switch to cash over this period would have meant missing out on the fastest bull run in history.

Another issue with inferring asset allocation decisions following a yield curve inversion is, even with this predictive information to hand, the alternative investment options are not as obvious as you might think. At least not across traditional asset classes.

While US stock returns for the one-year period following a yield curve inversion are lower (4.7% vs. 9.0% during all other one-year periods), the data also suggests that US Treasury Bonds will underperform US stocks over this period.

A paper from Eugene Fama and Kenneth French concluded:

"We find no evidence that inverted yield curves predict stocks will underperform Treasury bills for forecast periods of one, two, three and five years"

So, while recent data may suggest that equity markets will experience slowing growth, switching to bonds or cash is not the answer.

Stay the course.

"Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves" - Peter Lynch.

To learn how to protect your portfolio in a recession, go to theislandinvestor.com.

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No stopping Joe as he reaches third in the world

By Sean Moriarty A Killarney man who finished third in one of the world’s most-difficult adventure races has not ruled out another attempt in an effort to win it. The […]

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By Sean Moriarty

A Killarney man who finished third in one of the world’s most-difficult adventure races has not ruled out another attempt in an effort to win it.

The Spine Race is a non-stop 431km course over mountains and moors in the North of England.

Lissivigeen man Joe O’Leary was given one week to complete the gruelling course but managed to complete it in half that time in 96 hours and 50 minutes to finish third overall – or four days and 50 minutes!

He ran almost non-stop through ice, knee-deep snow and a wind-chill factor of -15.

He survived on a total of 90 minutes sleep taken at short intervals at various way-points along the route.

Joe is no stranger to adventure racing.

In September 2019 he ran for 28-hours straight to finish the Ultra-Trail du Mont-Blanc, a 160km race in the French Alps.

This time last year he finished third in the shorter Montane Spine Challenger Race.

On that occasion he completed the 173kms course in 30 hours but this year he returned to compete in the harder 431km event where his competition included professional athletes.

CHALLENGE

Joe and his fellow competitors set off from the start in Edale in the heart of England’s Peak District at 8am on Sunday, January 14.

Nearly one hundred hours later, just before 9am on Thursday morning (January 15), he crossed the finish line in Kirk Yetholm, a small village just over the Scottish border.

Along the way he was obliged to visit certain way-points or time controls and here he was able to change into fresh clothes, eat a dinner (or two) and grab a few minutes sleep before re-joining the course.

Outside assistance is strictly forbidden, and apart from the official checkpoints there are a few ‘approved’ private houses along the way that offer hot drinks and small meals.

Even bringing supporters is frowned upon – if a fan cheers for one racer they must cheer for all the racers – otherwise it is seen as unfair.

“This was my first time doing the long race,” he told the Killarney Advertiser.

“It was fantastic but totally unexpected to be on the podium. It was a strong field and first and second were pros…this is their job.”

Starting out in pouring rain the conditions soon turned to ice, snow and eventually waist-deep snow.

Volunteers fed competitors in scout halls or similar along the route and it was places like this Joe grabbed some shut eye – but not much.

“They really look after you. If you wanted two or three dinners to keep you going you could have them,” he said. “The problem is the clock does not stop. And the more time you spend at way points the more it will effect your results.”

Joe has no immediate plans but intends to visit Australia in May for a well earned holiday.

“I have entered a race in Sydney!” he added.

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Kerry Airport takes flight with new football club

Kerry Airport Ireland has been announced as the sponsor of the first-ever Kerry Football Club jersey ahead of the club’s debut in the SSE Airtricity First Division. The home kit, […]

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Kerry Airport Ireland has been announced as the sponsor of the first-ever Kerry Football Club jersey ahead of the club’s debut in the SSE Airtricity First Division.

The home kit, which is green with a white and gold trim and supplied by New Balance, was on the Kerry Airport runway today (Thursday) and is ready for take-off in the first home game next month.

The two change kits, which will also feature Kerry Airport’s branding, will be available to purchase this month.

“The establishment of the new Kerry Football Club is a major milestone in the sporting history of the county,” John Mulhern, the CEO of Kerry Airport Ireland, said.

“At Kerry Airport, we recognise the crucial role that sport plays in bringing communities together either through playing, coaching or attending matches. Kerry Football Club will elevate the profile of soccer in the county to a new level while giving talented players an opportunity to shine. We are proud to play our part and we are looking forward to working closely with Kerry FC in their efforts to reach the top ‘flight’ of the League of Ireland.”

Kerry Football Club will play 36 games in the SSE Airtricity First Division with the opening fixture being at home against Cobh Ramblers at Mounthawk Park, Tralee, kicking-off at February 17.

Season tickets remain on sale from www.kerryfc.com while individual match tickets will be going on sale in the coming weeks.

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