The Stock Market’s Slide Toward Year-End

Our investment committee meets quarterly with our next meeting scheduled for next week, we will have a jam-packed agenda!  We know many clients are wondering what is causing the recent bout of anxiety in the stock market.  Below are a couple of items getting investors and our attention lately:

• Inverted Yield Curve. According to Bloomberg, every recession since the 1970’s has been preceded by an inversion of the yield curve (the 2-year treasury has a higher yield than the 10-year treasury). There has been focus of this in the media lately. As of today, the 2-10 spread has not inverted, only the 2-5 (2-year treasury and 5-year treasury). Regardless, in a strong economy the yield curve is generally steep, and investors get paid more the longer they have until their investment matures. Currently this is not the case, which is why bank stocks have suffered this year because they make their money by charging more to borrowers than they pay to depositors (the steeper the yield curve, the more money banks can make). There are a few points of note regarding this issue. As economist Michael McDonough stated, the inversion of the yield curve is usually a very long-term leading indicator. Since 1978, there have been an average of 627 days between the first inversion of 2-year and 10-year treasuries and the start of the next recession. This would imply a recession could be possible sometime in late 2020. According to Goldman Sachs, the S&P 500 has averaged a positive return of 19% from the time of an inversion to the start of the recession. So, running for the hills at this time may be counterproductive.
• Trade talks with China have caused an enormous amount of uncertainty around global trade. Multinational companies have a difficult time planning for the future when they don’t know what the rules will be. This has certainly caused a slowdown in the global economy and had a pronounced impact on the increased volatility in the stock and bond markets.
• With the Democrats taking over the House of Representatives in January, there is sure to be heightened political risk as well.The Russian probe into election interference and a turnover in the administration’s cabinet adds even more uncertainty to domestic politics and will most likely carryover to the trade talks as well.

Our investment committee meeting will be longer than usual this quarter as we have a lot of information to cover.  Those of you have been clients for many years know we do not make large bets, but we do tweak portfolios depending on our outlook and our client's risk tolerance.  We will continue to stay balanced and diversified while keeping a lookout for potential opportunities.

The Bond&Devick Team