Weekly Market Commentary December 10, 2018

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The market is starting to grate on some investors. The S&P 500 dropped 4.6% last week on concerns the reported trade truce wasn’t as substantial as hoped and that global economic growth continued to slow. Global stocks participated in the decline as the MSCI ACWI lost 3.5% last week. Concerns over economic growth have helped bonds recently, and the Bloomberg BarCap Aggregate Bond Index rose 0.9%. The tendency to stay in a tight range and revert to lows has made this market extra agonizing. (See accompanying chart.) 

Source: FactSet

Key Points for the Week

  • U.S. stocks slid 4.6% last week on growth and trade concerns.
  • Markets have traded in a narrow range since mid-October.
  • The Treasury yield curve inverted, which is a further sign investors are worried about the economy slowing.
  • Economic and trade news continued to pressure markets.

Two sets of factors have helped create the tight trading range. On the high side, the news on trade is never substantial enough to move markets back toward the September highs, and weak economic news reinforces concerns about growth. Markets were further pressured last week by the inversion of a small part of the yield curve, which raised further concerns about economic growth. (See below.) On the low side, valuations, announcements on interest rates or trade, and strong U.S. labor markets have been enough to coax investors to support stocks as they approach a 10% decline.

We expect volatility to continue and would not be surprised to see the markets swing lower this week. China’s trade growth was released over the weekend, and imports and exports both fell far short of expectations. The low numbers provide further evidence of weakening economic growth. However, there are also opportunities for the market to increase. Positive news on trade, announced by both the U.S. and China, could push stocks significantly higher.

The last couple months have been a tougher-than-normal period to be an investor. Investing is about getting rewarded to take on risks others don’t want to bear. For bearing this risk, stock investors have earned a substantial premium to those who keep their portfolios very conservative. This quarter feels like one of those periods in which investors must ride through a rough patch to reap the long-term rewards.

What is an inverted yield curve, and what does it mean?

Source: FactSet

An inverted yield curve occurs when a Treasury bond’s interest rate drops below a shorter-maturity bond’s rate. Normally, longer maturities have to offer a higher yield to compensate for the longer commitment of funds. As the accompanying chart shows, the interest rate on five-year Treasury notes is lower than the interest rate on three-year Treasury notes. Inverted yield curves are often associated with slowing economic growth, including recessions. Because of this past relationship, inverted yield curves receive frequent mention in many negative articles and reports.

To keep a balanced view on today’s yield curve:

  • Remember, past inversions have typically been more pronounced, i.e., most of the short maturities yield more than the intermediate and long maturities. Last week’s inversion was very slight and occurred only in the middle of the curve.
  • The yield curve is a symptom of concerns about economic growth. It doesn’t cause a recession, but it expresses concerns the Federal Reserve has raised rates too high and will have to cut them in the future.
  • The bond market isn’t always right. Continued evidence of economic growth, like we have seen in the U.S. jobs reports this year, could move markets in the other direction.

Fun Story

Captain Of His Destiny

Morton Jablin and his wife spent more time on cruise ships than they did on land. But since his wife passed away, Jablin moved aboard the Seven Seas Navigator cruise ship full-time. That was 13 years ago. The 94-year-old former Navy officer, known by the crew as “Captain,” says there’s no better place to be. The crew and staff tend to his every need, and he spends his days cruising on the ocean and seeing the world. “Life on board couldn’t be better,” he says.

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