Broker Check

December 10, 2018

| December 18, 2018
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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)

Source: FactSet

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.


Source: FactSet

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.

Weekly Focus

“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

Links & Disclaimers
RJFS and SPC do not offer or provide legal or tax advice. Tax services and analysis are provided by the related firm, S&M through a separate engagement letter with clients. Portions of this newsletter were prepared by Carson Group Coaching. Carson Group Coaching is not affiliated with RJFS, SPC or S&M.  The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  This information is not intended as a solicitation of an offer to buy, hold or sell any security referred to herein.  There is no assurance any of the trends mentioned will continue in the future.  Any opinions are those of the author and not necessarily those of RJFS.  Any expression of opinion is as of this date and is subject to change without notice.

Opinions expressed are not intended as investment advice or to predict future performance.  Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.  Past performance does not guarantee future results.  Investing involves risk, including loss of principal.  Keep in mind that there is no assurance that any strategy, including diversification and asset allocation, will ultimately be successful or profitable nor protect against a loss. Consult your financial professional before making any investment decision.  Stock investing involves risk including loss of principal. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock companies maintained and reviewed by the editors of the Wall Street Journal. Please note direct investment in any index is not possible.

The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index's three largest industries are materials, energy, and banks. Investing in emerging markets can be riskier than investing in well-established foreign markets.

The MSCI ACWI (All Country World Index) is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. As of June 2007, the MSCI ACWI consisted of 48 country indices comprising 23 developed and 25 emerging market country indices. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.

The Barclays Capital Aggregate Index measures changes in the fixed-rate debt issues rated investment grade or higher by Moody's Investors Service, Standard & Poor's, or Fitch Investors Service, in that order. The Aggregate Index is comprised of the Government/Corporate, the Mortgage-Backed Securities and the Asset-Backed Securities indices.

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