On It with Offit
BY BEN OFFIT, CFP®
"If your ship doesn't come in, swim out to meet it!"
- Jonathan Winters
Over the last 40 years, when the U.S. yield curve inverted, the market was up 66% of the time 1 year later and 33% of the time 3 years later. Globally, the market is up 86% of the time 1 year later and 71% of the time 3 years later.
"It is our choices, that show what we truly are, far more than our abilities."
- J.K Rowling
"Twenty years from now you will be more disappointed by the things that you didn't do than by the ones you did do."
- Mark Twain
"Courage is being scared to death, but saddling up anyway."
- John Wayne
"A successful man is one who can lay a firm foundation with the bricks others have thrown at him."
- David Brinkley
Over the last 50 years, the U.S. has been in expansion over 85% of months and been in recession under 15%. More money has been lost than made betting on avoiding these brief pullbacks.
"We make a living by what we get, but we make a life by what we give."
- Winston Churchill
"Before you speak, listen. Before you write, think. Before you spend, earn. Before you invest, investigate. Before you criticize, wait. Before you pray, forgive. Before you quit, try. Before you retire, save. Before you die, give."
- William A. Ward
Four decades ago, the average time you had to escape a house fire, from the moment your smoke alarm went off, was 17 minutes. Today, it’s three minutes or less. Despite fire codes and building regulations, modern homes just burn faster.
On average, consumers buy 60% more clothing today than they did 15 years ago but keep the items half as long. Nearly 60% of the more than 100 billion garments produced annually end up in incinerators or landfills.-The Wall Street Journal
The typical American eats the equivalent of about 50 chickens or half a cow every year.
“A man who has never gone to school may steal from a freight car; but if he has a university education, he may steal the whole railroad.”
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The volatility that equity markets experienced in August really kicked-off in late July when stock market highs, trade concerns and Fed uncertainty collided. The S&P 500 Index achieved a new all-time high in July and broke above the 3,000 level for the first time in its history, but suffered a rather large sell-off following the July FOMC meeting.
Investors were not pleased to hear Fed Chairman Powell’s characterization of the rate cut as more of a mid-cycle adjustment versus a new loosening cycle, and President Trump announced new tariffs on China soon afterwards. Fed policy uncertainty and trade concerns were front and center during most of August and led to some significant swings in the market. Volatility, as measured by the VIX Index, hit its highest levels in August since early January as equities had a hard time finding their footing during the month. As August concluded, trade issues remained unresolved and the meeting of central bankers in Jackson Hole, Wyoming led to another volley of tweets by the President pressuring the Fed to cut rates.
To say the markets will watch closely the lead up to and conclusion of the FOMC meeting on September 17-18 is an understatement. Additionally, progress and/or setbacks on the trade front with China will preoccupy the market until some clarity is achieved on this matter.
The ongoing theme of large-cap growth stocks outperforming other equities continued in August despite stock market declines across the board. Small and mid-cap stocks underperformed their large-cap counterparts, growth outperformed value and U.S. equities outpaced international stocks. The value/growth relationship continues to be stretched to historic extremes and should the current situation revert to more historical norms, value-oriented stocks should benefit.
The numbers for August were as follows: The S&P 500 declined – 1.58%, the Dow Jones Industrial Average fell – 1.32%, the NASDAQ Composite dropped – 2.46%, and the Russell 2000 Index, a measure of small-cap companies, lost – 4.94%. Large-cap value stocks, as measured by the Russell 1000 Value Index, lagged their growth counterparts once again in August declining – 2.94% compared to large-cap growth stocks, as measured by the Russell 1000 Growth Index, which fell only – 0.77%.
International equities continued to feel the brunt of U.S. dollar strength and declined during August. In fact, the U.S. dollar index continued to rise and put in its highest mark since 2017. Sluggish international economies also contributed to global stock market weakness. With this backdrop, emerging market equities, as measured by the MSCI Emerging Markets Index, fell by – 4.88% in August and the MSCI ACWI ex USA Index, a broad measure of international equities, declined – 3.09% for the month. International stocks are positive year-to-date, but in general, their gains have been well below the returns of U.S. stocks.
Fixed Income Market
The headline story in August (in a month of many headline stories) was the dramatic drop in U.S. Treasury yields. By the end of August, all points along the Treasury yield curve were below the Fed Funds target rate. The 10-year U.S. Treasury yield approached lows last seen in July 2012 and July 2016 below 1.5%. The 30-year U.S. Treasury yield dropped below 2.0% during the month, its lowest point on record.
The amount of global bonds with negative yields continued to increase in August with the count well above $15 trillion. The yield on the 10-year U.S. Treasury ended July at 2.02%, but plunged to close August at 1.50%. Even more dramatic, the yield on the 30-year U.S. Treasury closed August at 1.96% after closing July at 2.53%. During a month of sharply declining yields, bond prices rallied.
The yield curve inversion now exists throughout the curve when comparing yields to the Fed Funds target rate. We acknowledge that an inverted yield curve has been a historically negative signal for the direction of the U.S. economy. At the same time, other economic readings that tend to be on the front end of the economy, like the leading economic indicators index and job market data, are not showing the same cautionary signals. We continue to monitor developments in this area closely but expect ongoing economic growth through 2019 and into 2020.
The Fed is trying to engineer a challenging balancing act by supporting economic growth, but at the same time, not cutting rates too much too soon. Market forces are already lowering rates on their own when one looks across most points on the yield curve. Negative global yields, declining rates in the U.S. and continued pressure from the Trump administration to cut rates only complicates the job of the Federal Reserve as we move toward the September FOMC meeting.
In this environment, fixed income results were as follows: The Bloomberg Barclays U.S. Aggregate Bond Index was up 2.59% for the month, the Bloomberg Barclays U.S. Credit Index gained 3.13%, the Bloomberg Barclays U.S. Corporate High Yield Index inched higher by 0.40% and the Bloomberg Barclays U.S. Treasury Index gained 3.40%. TIPS showed gains for the month and muni bonds also advanced in August. One of the most interest rate sensitive fixed income categories is long maturity U.S. Treasury bonds and, reflecting this sensitivity, the index measuring 30-year U.S. Treasury performance gained 12.53% for the month alone.