December is usually the best month of the year for the stock market. It has been since 1950, according to Randall Forsyth of Barron’s, but not so far this year.
Two issues made investors particularly uncomfortable last week which helped trigger a sell-off that pushed major U.S. stock indices lower.
⦁ Fading optimism about an easing of trade tensions with China. It looked like the relationship between the United States and China might thaw, and Americans were feeling pretty optimistic about a trade truce. In fact, markets moved higher Monday in anticipation.
Unfortunately, on the same day that Presidents Trump and Xi Jinping shared a cordial dinner, the chief financial officer of a major Chinese telecommunications firm was arrested at the request of the United States. The Economist reported, “[The company] is a pillar of the Chinese economy – and Ms. Meng is the founder’s daughter. The fate of the trade talks could hinge on her encounter with the law.”
⦁ A section of the yield curve inverted. Normally, Treasury yields are higher for longer maturities of bonds than for shorter maturities of bonds. Last week, yields on three-year and five-year bonds inverted, meaning yields for three-year bonds were higher than those for five-year bonds. Ben Levisohn of Barron’s explained:
“Usually when people talk about an inversion, they’re talking about the difference between two-year and 10-year Treasuries, or three-month and 10-year Treasuries, which have been useful, though not perfect, predictors of recessions and bear markets. Last week, though, everyone was talking about the three-year and the five-year Treasury inverting – something that usually doesn’t get much notice…And for good reason.”
Historically, these maturities have inverted seven times. In one instance, the country was already in recession. On the other six occasions, recession didn’t occur for more than two years. Barron’s reported the Standard & Poor’s 500 Index gained an average of 20 percent over the 24-month periods following these inversions.
Investors’ negative response to last week’s news may have been overdone. Financial Times reported European and Asian markets firmed up a bit Friday “…as buyers stepped back in after dramatic declines on Thursday.”
Global stocks participated in the decline as the MSCI ACWI lost 3.5 percent last week. Concerns over economic growth have helped bonds recently, and the Bloomberg BarCap Aggregate Bond Index rose 0.9 percent. The tendency to stay in a tight range and revert to lows has made this market extra agonizing. (See chart)
On the high side of the range, the news on trade is never substantial enough to move markets back toward the September highs, and weak economic news reinforces concerns about growth. On the low side of the range, valuations, announcements on interest rates or trade, and strong U.S. labor markets have been enough to coax investors to support stocks as they approach a 10 percent decline.
We expect volatility to continue and would not be surprised to see the markets swing lower in the weeks ahead. China’s trade growth was released over the weekend, and imports and exports both fell far short of expectations. The low numbers provide further evidence of weakening economic growth. However, there are also opportunities for the market to increase. Positive news on trade, announced by both the United States and China, could push stocks significantly higher.
The last couple months have been a tougher-than-normal period to be an investor. Investing is about getting rewarded to take on risk others don’t want to bear. For bearing this risk, stock investors have earned a substantial premium to those who keep their portfolios very conservative. This quarter feels like one of those periods in which investors must ride through a rough patch to reap the long-term rewards.
Last week, much focus was paid to the yield curve and the inversion of the curve between 3-year US Treasury bonds and 5-year US Treasury bonds. An inverted yield curve occurs when a longer-term Treasury bond’s interest rate drops below a shorter-maturity bond’s rate.
Normally, longer maturities have to offer a higher yield to compensate for the longer commitment of funds. As the accompanying chart shows, the interest rate on five-year Treasury notes is lower than the interest rate on three-year Treasury notes. Inverted yield curves are often associated with slowing economic growth, including recessions. Because of this past relationship, inverted yield curves receive frequent mention in many negative articles and reports.
To keep a balanced view on today’s yield curve:
⦁ Remember, past inversions have typically been more pronounced, i.e., most of the short maturities yield more than the intermediate and long maturities. Last week’s inversion was very slight and occurred only in the middle of the curve.
⦁ The yield curve is a symptom of concerns about economic growth. It doesn’t cause a recession, but it expresses concerns the Federal Reserve has raised rates too high and will have to cut them in the future.
⦁ The bond market isn’t always right. Continued evidence of economic growth, like we have seen in the U.S. jobs reports this year, could move markets in the other direction.
Key points for the week
⦁ U.S. stocks slid 4.6 percent last week on growth and trade concerns.
⦁ Markets have traded in a narrow range since mid-October.
⦁ The Treasury yield curve inverted, which is a further sign investors are worried about the economy slowing.
⦁ Economic and trade news continued to pressure markets.
About time and money.
Elizabeth Dunn, associate psychology professor at the University of British Columbia in Vancouver, Canada, and Michael Norton, associate marketing professor at Harvard Business School, have been studying whether people should spend money differently. Their goal is to figure out how to get the most happiness for the dollars spent. In Happy Money: The Science of Happier Spending, they explained their experiments:
“…We started doling out money to strangers. But there was a catch: rather than letting them spend it however they wanted, we made them spend it how we wanted…changing the way people spent their money altered their happiness over the course of the day. And we saw this effect even when people spent as little as $5…Shifting from buying stuff to buying experiences, and from spending on yourself to spending on others, can have a dramatic impact on happiness.”
In addition, buying time can improve happiness. How do you buy time? By paying someone else to do tasks you don’t like to do – cleaning, grocery shopping, home maintenance, and other tasks. This can relieve time pressure and free up time to do what you really want to do – and that can make you happier.
The authors suggest individuals ask a simple question before making any purchase: How will this purchase change the way I use my time? Make sure the answer aligns with the goal of having an abundance of time.
“Happiness is when what you think, what you say, and what you do are in harmony.”
~ Mahatma Gandhi, Leader of Indian independence movement
"Every memorable act in the history of the world is a triumph of enthusiasm. Nothing great was ever achieved without it because it gives any challenge or any occupation, no matter how frightening or difficult, a new meaning. Without enthusiasm you are doomed to a life a mediocrity but with it you can accomplish miracles."
~ Og Mandino, Speaker and Author
"The important thing is not to stop questioning."
~ Albert Einstein, physicist
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