What’s on Tap: Stock, Bond Markets March On to Bullish Quarter End

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  • The Inversion Diversion: Yield Curve Perspective

  • Recession Calls Are Premature but Risk-Aware Investment Discipline Key

  • Global Growth Softens: Europe More Vulnerable to Recession

  • Revised Fed Stance Buoys Bond Market Investors, Homebuyers 

  • Financial Planning Friday: 2019 Financial Resolutions

  • Looking Ahead to Retail Sales, Manufacturing, Consumer Credit and More

Major market indexes are poised to post double-digit gains for the first quarter as we go to print on the final trading day of March—one of the best three-month periods in the past three decades for stocks and bonds. That may come as a bit of a surprise given worries over the yield-curve inversion, concerns about slowing domestic and global economic growth (especially in China), and the ongoing Brexit tumult.

The quarter is also ending on a bullish note with car-hailing service Lyft selling shares to the public this morning. It’s the first of what could be a steady stream of high-profile stock offerings from companies in the technology sector. Rival Uber, as well as photo-search site Pinterest and other unicorns (companies with billion-dollar-plus private valuations) are waiting in the wings for their turn on the stage.

For the year through Thursday, the Dow Jones Industrial Average and the broader S&P 500 have returned 10.9% and 12.9%, respectively. The MSCI EAFE index, a measure of developed international stock markets, is up 9.4%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has dropped to 2.91% from 3.28% at 2018’s end. On a total return basis, the U.S. bond market has gained 3.0% for the year.

The Inversion Diversion: Yield Curve Perspective

The amount of ink being spilled and air time being wasted on talk of a “yield-curve inversion” signaling a “recession” is out of control. We think a little perspective is needed.

First, let’s review the multiple ways an inverted yield curve, when short-term bonds yield more than longer-term bonds, is being defined. Should we be concerned when the yield on a 3-month Treasury bill is higher than the yield on a 10-year Treasury bond? When the 2-year yield is higher than the 10-year yield? Or maybe when the 5-year yield is lower than the 2-year yield? Those are just a few ways pundits are framing inversion scenarios these days.

In years past, a true yield-curve inversion occurred when the longest-maturity bonds sported the lowest yields and the shortest had the highest yields. By that definition, we are not seeing an inverted yield curve. Period.

Still, even if we agree the yield curve is inverted today, it’s not an ironclad guarantee of a recession. One set of data shows the yield curve having inverted nine times over the last 60 or so years, after which seven recessions ensued. That’s a 22% “miss” rate on a tiny set of data. You may have heard some people say the yield curve must remain inverted for 10 days before it signals a recession; others say it has to remain so for a full quarter to count. And then even if a yield-curve inversion is predicting an upcoming recession, it would be 12 to 18 months down the road, historically speaking.

When closely examined, the supposedly clear recession signal provided by an inverted yield curve turns out to be rather fuzzy. Of course, that doesn’t mean the bond market isn’t signaling a recession; it very well may be. We’re not throwing inversion caution to the wind—but neither are we unquestioningly buying in to one theory or another’s predictive value.

Recession Calls Are Premature but Risk-Aware Investment Discipline Key

One thing we are confident of: Whether the yield curve is inverted today or not, there is a recession coming. We can’t tell you when, but as night turns to day and winter turns to spring, eventually the economy will go from expansion to contraction and we’ll have a recession.

But even then, the average recession lasts a bit more than 13 months. The average expansion? Close to five years! The current run of economic growth is now the second-longest on record, at 117 months, and if we continue growing through the end of June, we’ll be in record territory. (Even if it hasn’t been the swiftest: Slow growth, not no growth has been the overarching theme.)

What are we focused on? The strength of the driver of our economy (the consumer), the wisdom of Federal Reserve policymakers, the ability of our tactical strategies to react to changing market trends and the steadfastness of our risk-aware investment discipline.

Four defenses against what may or may not turn out to be a recession—that’s our bulwark.

Global Growth Softens: Europe More Vulnerable to Recession

While the Brexit kerfuffle remains deadlocked in advance of key deadlines on April 12 and May 22, investors and markets are taking a rational, wait-and-see approach. To us, Brexit headlines deserve less attention than the slow pace of economic growth in Europe. We think European economies are more vulnerable to recession than the U.S., but note that a stumble there could take a toll on our economy.

As we have written several times over the past year, more concerning to us than Europe’s slowdown is the deceleration in China, the world’s second-largest economy. So long as the U.S. economy continues to expand and China’s doesn’t weaken faster than expected, then the robust year-to-date returns in the stock market may be defensible, or at least recoverable, should the tide turn. 

Revised Fed Stance Buoys Bond Market Investors, Homebuyers

Bond bulls continued in full stride as bond prices rose around the globe in response to the Fed’s statement last week that, contrary to previous guidance, no additional interest-rate hikes  are anticipated for 2019. The result is a continuation of the rally that has lifted every ship in the bond market’s harbor as interest rates have fallen.

Bond-market investors aren’t the only ones benefiting from the Fed’s adjusted interest-rate policy stance. 30-year mortgage rates have fallen below 4% again, a boon not only to homeowners looking to refinance higher-interest-rate loans, but also to homebuyers who will pay less to borrow. Those lower costs should make a home purchase a little more affordable, potentially breathing new life into the housing market.

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 Financial Planning Friday

Checking on Your 2019 Financial Resolutions

April Fool’s Day on Monday means we’re already a quarter of the way through 2019. And it would be foolhardy to miss this occasion to reflect on how you’re progressing toward the financial goals and resolutions you made at the beginning of the year.

Perhaps you wanted to increase your 401(k) contributions, pay off your credit card debt, book a trip overseas or save up for a new convertible to drive this summer. Whatever your goals for the year are, regularly measuring your progress will keep you on the path to success—it’s easier to right the ship now than when you’re at the year’s halfway point. The good news: Plenty of time remains to check those goals off your list. 

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Looking Ahead to Retail Sales, Manufacturing, Consumer Credit and More

Next week we’ll be poring over reads on retail sales, construction spending, manufacturing and the service sector, durable goods orders, car sales, jobs (including the unemployment rate for March), average hourly earnings and consumer credit.

If you’d like to learn more about our tactical or fundamental strategies, please contact Steve Johnson at 844-587-7393 or info@bravercapital.com

Please note: This update was prepared on Friday, March 29, 2019, prior to the market’s close.

This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as recommendations or personal investment advice, or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged. 

Past performance is not an indication of future returns. The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. We do not provide legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation. 

Companies mentioned in this article are not necessarily held in client portfolios and our references to them should not be seen as a recommendation to buy, sell or hold any of them.

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