I thought we were in a bull market?
We were bullish on the market and still am today. We are in the early
stages of a full bull market. However, this does not mean we can stick
our head in the sand and ignore the short-term gyrations this market
will offer to us over the next 90 days or longer. This recent market
volatility is all policy driven by the China - US trade conflict. It
has impacted retail, wholesale, capital expenditure delays, etc.
Further it has driven a yield inversion for the second time in a few
months and more importantly an inversion in the 10yr - 2yr Treasury
inversion. The past tariffs Trump put on is expected to trim 0.2% off
of global GDP. This impacts Europe even more as they are more
sensitive and do not have the large diverse economy we have here in
the United States.
With Trump delaying the additional tariffs just announced last week it
is giving the market the uncertainty that makes most investors
nervous. The expectation of another 1/2% cut in the Fed rates is
driving down the 10 year Treasury. Why does an inverted yield curve
cause a recession? Simply, if inflation was a problem they would
reduce rates and try to choke off the banks from lending to slow down
the economy. This time is different because inflation is too low, not
too high. If you are a bank and you had to borrow at an overnight rate
of 3% and lend it at 2%, you are losing money and would not lend.
Today, the banks have plenty of reserves because of regulation so they
don't have to borrow overnight and can lend with their excess reserves
without borrowing. This is why although the yield curve is inverted or
close to tight we still have low unemployment and the economy is not
flashing all the other signs of a recession.
Just some additional stats on the inversion. After the past
inversions, stocks rose an average of 15% after the inversion until
the next recession which was an average of 14 months later. Germany
may see a recession in the next quarter, but we may postpone ours. The
average treasury yield during the last 9 inversions was 6.11%, this
time is extremely different with rates around 2%. This means there is
not much room with global rates already in negative territory and the
US the best place to invest for the long-term, thus driving down rates
and not induced by high inflation.
The investor sentiment along with the uncertainty caused by the
President is likely to cause the market another 5-7% downturn in the
market before we see a bounce back up, just like the last 'ABC'
pattern (see chart below) the last time rhetoric was high regarding
tariffs. Ultimately, we may see a recession, but I think it will be a
much softer recession than we have seen before. Rates are low and
unemployment is low. This is a recipe for expansion, albeit slow, but
Why not move to cash until this volatility is over in 180 days or even
through the next election? Simple. The largest moves back up happen
within a few days of the bottom so if you sit on the sidelines and it
is a shallow drop, your portfolio may lose 3-5%. Also, as we said
earlier, the market may move higher by 15% and then correct 20%. The
United States is undefeated in comebacks and this time is no
different, it just may make us a bit nervous.
If you are not a client of NewtonWealthManagement and want to see if your current portfolio is
structured to take advantage of the 2019 market, let us analyze your
portfolio (for free) and see if there are changes we would recommend
to help you get better results in the market. To learn more about our
free portfolio review,
click here or to get started, call Kristen Hensley at the office