Inverted yields nothing new, Chinese tariffs delayed, and more
Let’s Talk About Yields – Financial newswires are saturated with stories about how the bond markets – via an inverted yield curve – are sending recessionary signals. It didn’t help matters when the stock market sold off sharply early in the week, triggered by the 2-year U.S. Treasury yield ticking above the 10-year U.S. Treasury yield. Since historically an inverted yield curve has been a reliable predictor of recessions, this event spooked the markets and led to pronounced downside volatility. But there are a couple of key historical insights to consider. First, since 1978 the market has actually rallied by an average of +13% from the time a yield curve first inverts to the beginning of a recession. That’s because historically, a yield curve inversion itself has not actually corresponded perfectly with a recession. The recession tends to come several months or even years later. Second, technically speaking the yield curve has been inverted for months. The Federal Reserve’s preferred measure of the yield curve (10-year yield minus 3-month yield) has been inverted since May.1 To us, the new development of the 2-year ticking higher than the 10-year is a signal of investors reacting fearfully to an old story, which in our experience characterizes market corrections, not bear markets.
When it Comes to Yields, Stocks are Arguably More Attractive than Bonds – Across the world, there is approximately $15 trillion in government debt with a negative yield, much of which comes from developed countries with historically strong economies: Germany, Sweden, Japan, and more. In this scenario, investors are actually paying money to park their assets in developed country bonds. Fears are growing that the U.S. is headed in a similar direction, with historically low interest rates and a Fed poised to lower them further. Time will tell, but it is worth considering that with the current state of low interest rates globally, nearly 60% of S&P 500 stocks pay a higher dividend than the current yield on the 10-year U.S. Treasury.2
Investing is emotional especially when volatility comes into play. A bull market can be as exhilarating as a bear market is terrifying (ask any investor who went through 2008). But in our view staying invested is key – since 1926, investors who remained in the market over the long-term came out ahead 99% of the time.3
It’s important to maintain perspective during rough periods so you don’t overreact. If you have $500,000 or more to invest, get our free guide, How to Avoid Emotional Investing. It provides our advice, based on decades of experience, to help you navigate through turbulent times.
Tariffs Delayed, But Not Gone – The equity markets got brief respite from volatility this week, when the Trump administration delayed tariffs on $300 billion of mostly consumer goods imported from China. The 10% of additional tariffs, originally set to go into effect on September 1, will target products like smartphones, laptops, toys, and videogames – all staples of the holiday shopping season for American consumers. These tariffs are now set to go into effect on December 15, which will give retailers the opportunity to build inventories for holiday season without incurring the additional tax.5
Americans Have More Mortgage Debt Than Ever – If there’s an upside to low interest rates across the globe and here in the U.S., it’s that borrowers can take advantage of low financing costs to purchase homes or perhaps re-model existing ones with additional mortgages. Problem is, recent history suggests that over-borrowing in the mortgage market can lead to imbalances that can have negative consequences if a recession hits. At the end of the second quarter, mortgage balances stood at $9.406 trillion, which is a higher mark than the $9.294 trillion of outstanding mortgages reached in Q3 of 2008. A recent rule passed by the Trump administration may make borrowing easier as well, with Fannie Mae and Freddie Mac now being required to consider other measures besides FICO scores when determining credit-worthiness.6
No matter how these stories unfold, it is impossible to control the highs and lows of market. But there are ways you can manage the highs and lows of your own emotions and stay focused on your long-term goals.
In our view, staying invested is key – since 1926, investors who remained in the market over the long-term came out ahead 99% of the time.7
If you have $500,000 or more to invest, get our free guide, How To Avoid Emotional Investing.8 It provides our advice, based on decades of experience, to help you navigate through turbulent times.
2 The Wall Street Journal, August 11, 2019. https://www.wsj.com/articles/investors-ponder-negative-bond-yields-in-the-u-s-11565521203?mod=djem10point
3 Source: Morningstar Direct, 12/31/18. Analysis is performed by looking at the rolling monthly return periods for the S&P 500 Index over the 1-month, 3-month, 1-year, 5-year, 10-year and 15-year to determine if the total return of the index was positive. Respective percentages were calculated off of the number of periods that the index was positive out of the entire history of the data set from 1926-2018.
4 ZIM may amend or rescind the “How To Avoid Emotional Investing” guide for any reason and at ZIM’s discretion.
5 The Wall Street Journal, August 14, 2019. https://www.wsj.com/articles/u-s-will-delay-some-tariffs-against-china-11565704420?mod=djem10point
6 The Wall Street Journal, August 13, 2019. https://www.wsj.com/articles/u-s-mortgage-debt-hits-record-eclipsing-2008-peak-11565708431?mod=djem10point
7 Source: Morningstar Direct, 12/31/18. Analysis is performed by looking at the rolling monthly return periods for the S&P 500 Index over the 1-month, 3-month, 1-year, 5-year, 10-year and 15-year to determine if the total return of the index was positive. Respective percentages were calculated off of the number of periods that the index was positive out of the entire history of the data set from 1926-2018.
8 ZIM may amend or rescind the “How To Avoid Emotional Investing” guide for any reason and at ZIM’s discretion.
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