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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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Wildflowers are not always simple to grow

By Debby Looney, gardening expert There is nothing quite like the low, humming sound of insects in the garden. I always find the different pitches of the buzzing fascinating, from […]

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By Debby Looney, gardening expert

There is nothing quite like the low, humming sound of insects in the garden. I always find the different pitches of the buzzing fascinating, from the drone of a big, furry bumble bee to the high pitched whirring of hoverflies.

And wasps always seem to have a dangerous sound – it is unique to them, in any case. It is possible to help pollinators into your garden at almost any time of the year, solitary bees such as bumbles and leafcutter bees, will come out of hibernation on a sunny December day if there are some heather flowers nearby. tulips, hyacinths, crocus and snowdrops provide sustenance in early spring, along with shrubs such as hamamelis, daphne, viburnum and willow. In April, the small flowers of the field maple attract many insects, as do the large trumpet shaped flowers of rhododendrons and azaleas. Wildflowers are now beginning to bloom, and they are the subject of today’s column!

While it seems counterintuitive, wildflowers are not always simple to grow, especially as we mean ‘pretty meadow blooms’ as opposed to ‘weeds’! Creating an area for wildflowers takes some preparation. Most important is that it is a weed free area. Kill off any grass or weeds before sowing, either by using conventional weedkillers, or by laying down a sheet of black polythene or weed suppressant. Make sure any seeds which germinate are removed also, and that problematic plants such as rushes, are dug out. Most importantly, ensure all grass is gone, as wildflowers do not compete well against its vigorous growth. Rake the top layer of the soil loose to a fine tilth, and do not add fertiliser! Wildflowers will generally not do well in a rich soil. When your area is ready, decide which seeds are best for your spot. There is much to choose from, for example, single varieties such as ragged Robin, teasels and poppies, or mixtures. There are seed mixes for perennial meadows, ones which attract birds – these usually have a high volume of seed bearing flowers, mixes for bees, ladybirds or certain colour mixes. There are also soil specific mixes.

SOWING SEEDS

Sow your seeds thinly and evenly onto the prepared ground. I tend to cover with netting at this time of year, because, although it is the best time of year to sow, and there is a very high germination rate, birds are also a problem!

The only maintenance really is to keep an eye on slug damage – I scatter in a few pellets when I sow anything – and if there are very dense clumps of seedlings forming, thin them out. When the flowers have gone to seed in the autumn, just cut them to ground level, leave the cuttings a few days for the seeds to drop out, and rake the foliage up. If left to rot in situ, it will make the soil too fertile for a good display the following year.

I mention the use of slug pellets. To the best of my knowledge, the use of metaldehyde poison in slug pellets has been banned for a few years now, and pellets are made of ferric phosphate which is not harmful to pets or birds unless ingested in very large amounts. However, there are some ingredients used in slug pellets which may potentially cause damage to earthworms and other soil dwellers, so please, always use sparingly and where possible, not at all!

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Routine and balance are crucial in the run up to exams

By Niamh Dwyer, Chairperson of the Kerry Branch of Guidance Counsellors As you approach the countdown to the beginning of the Junior and Leaving Cert Exams on June 8, it […]

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By Niamh Dwyer, Chairperson of the Kerry Branch of Guidance Counsellors

As you approach the countdown to the beginning of the Junior and Leaving Cert Exams on June 8, it is very important to maintain a healthy balance so that you can pace yourself properly.

It can be tempting to try to pack in long hours of last minute study at this stage and become more focused on what you don’t know instead of what you do! Stress is a normal part of facing exams and in fact a certain amount of it is helpful to ensure that it mobilises you to perform well, but it is essential that you keep it, and the exams, in perspective. After many years of supporting students before, during and after exams, I know too well how overwhelming the experience can be so I urge you to do everything you can to look after your well-being at this stage.

Before the exams

Stick to a good routine with a healthy balance in terms of revision, rest, fresh air, sleep and diet. Don’t be tempted to work late at night as it is usually unproductive and impacts on your concentration the following day. Approach your last minute revision in a targeted way with the guidance you have been given by your teachers. Have a schedule with your exam dates/times highlighted hanging up where it is obvious and visible at home and take a photo to save on your phone.

During the exams

Set two alarms for the mornings of exams and allow lots of extra time. You will need to be in your assigned seat in the exam centre at least 30 minutes before the start of the exam on day one and 15 minutes before all other exams. Hydration is really important during the exams to help with concentration so make sure you have plenty of water. The first thing to do when you look at the paper is to read the instructions carefully, your teacher will have gone through these many times with you. Mark all the questions you are going to do and write out a quick time plan for yourself. Focus on exactly what you are being asked; the most common feedback from examiners is that students give a lot of irrelevant information so keep glancing back at the question to keep yourself on task to target the marks.

Breathing

If you feel you are becoming really anxious in the exam hall, focus on controlling your breath to bring a sense of calm. Breathe in through your nose for two seconds, hold your breath for one second, and breathe out through your mouth for four seconds. Repeat for one minute.

After the exam

Try to avoid too much discussion after each paper, ‘post-mortems’ of the exams are rarely helpful and can add to stress levels so once each exam is done, take a break and then move on to preparing for the next one. I can tell you that regardless of what happens in each exam, you will have lots of options available to you and an interesting journey ahead.

Keep in mind that while the Leaving Cert is an important exam and big milestone, it will not define you for the rest of your life. Best of luck to the class of 2022!

Niamh Dwyer is a Guidance Counsellor in Scoil Phobail Sliabh Luachra, Rathmore, and Chairperson of the Kerry Branch of Guidance Counsellors. She is also a Career Consultant. For details see www.mycareerplan.ie or follow @mycareerplan on Facebook, Instagram or Twitter.

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