Through the end of August, U.S. stock and bond markets produced solid returns.
Larger stocks and smaller stocks are generally higher by 10 percent or more. Bond returns have been solid as well, with many bond sectors higher by at least 5 percent. Markets have endured the ongoing reports of U.S./China saga: trade progress, trade stall, progress, and stall. The August stock market movement was largely driven by this pattern.
Compounding the larger point swings in markets are other issues that have headlined recently including the “inverted yield curve.” Often analyzed as a possible leading indicator of recession, an inverted yield curve is when short- term interest rates on bonds are higher versus longer-term rates. For example, in traditional bond buying, if I bought a 10-year bond, I might get a 4 percent annual interest rate or if I bought a two-year bond, I might expect only 2 percent. Investors tend to get paid to hold onto bonds for longer periods of time.
With a yield curve inversion, the scenario flips to where a shorter-term bond pays me more versus a longer-term bond. Many, many economic factors can create the perfect storm for a yield curve inversion and Wall Street experts are debating daily the cause of our current inversion.
Know what the hub-bub is all about as I write this at the very end of August 2019? The two-year US Treasury note is yielding 1.52 percent. The 10-year US Treasury note is yielding 1.51 percent. Yes, that is an inverted yield curve, but not by much. If we see any real or perceived reports of US-China trade process that inversion reverts to a more traditional “normal” yield curve.
No matter how the US-China issue progresses, any economy has normal regresses in the form of a recession. Notice how the “r” in recession is not capitalized – the reason is a recession is not the Great Depression from several generations ago.
A recession is a moderate slowdown in the economy, often including higher unemployment. In the economic cycle, a recession, even one as deep as the 2008 financial crisis, is followed by recovery often led by a rising stock market.
The critical issue often relates to my former economics professor’s hopeful joke from 1991 at Shippensburg: “When your neighbor loses their job, it’s a recession. When you lose your job, that’s a depression.” At 8 a.m., this largely fell on the sleepy ears of my fellow college freshmen. I could have been the exception.
Regardless of recession, expansion, trade, yield curves, etc., for investors, we need to understand that fear invoking headlines never make for a solid investment strategy. Panic should be reserved for very few occasions and the stock market isn’t one of them.
Greed is the other extreme emotion that sometimes can cause a reaction. We never want to let today’s greed pave into tomorrow’s panic. Stay balanced – work/life balance, family/friends, and with investing. Balanced means knowing how much risk is in your portfolio in all areas, not just stocks – but also in the bond portion too.
With investing, we develop an asset allocation plan with clients. We stick to the plan through appropriate diversification and adjustments. Rebalancing periodically helps by trimming winners and adding to underperformers – and goes often against the current emotion of markets.
However, my role is to be strategic versus reactive with investing. I save reacting to when my Philadelphia Eagles start playing games. But my family isn’t an investor in the Eagles, except for a pile of jerseys.
Markets will move higher and lower for right and wrong reasons. We know this fact, however, by learning from past emotions and even mistakes, success can be achieved over time.