JUNE 25, 2018
What time is it?
The yield curve may be the pocket watch of economic indicators. It’s been around for a long time and it’s often right, but not always.
The yield curve is the difference between the interest paid on two-year government bonds (some also use the 90-day T-Bill) and 10-year government bonds. In normal circumstances, an investor would expect to earn a higher rate of interest when lending money to a government for 10 years than when lending money for two years because there is more risk associated with lending for a longer period of time.
When the yield curve flattens or inverts, it suggests a shift in investors’ expectations. Financial Times explained:
“The slope made up of bond yields of various maturities has a record of predicting recessions that would make even the savviest economist envious. It is not perfect, but the curve has become flat and inverted – when short-term bond yields are actually higher than long-term ones – ahead of most economic downturns in most major countries since the second world war.”
In the United States last week, the difference between yields on 2-year Treasuries (2.56) and 10-year Treasuries (2.90) flattened. The gap narrowed to 34 basis points (a basis point is one-hundredth of one percent). The change reflects higher short-term rates, courtesy of the Federal Reserve. It also suggests tariffs and trade issues have made bond investors more pessimistic about prospects for U.S. growth, reported The Wall Street Journal.
Globally, the yield curve is inverted. “The average yield of bonds in JPMorgan’s broadest Government Bond Index that mature in seven to 10 years last week slipped below the average yields of bonds maturing in one to three years for the first time since 2007…that indicates that investors have a pretty grim view of where the world economy and equity markets are heading,” reported Financial Times.
In addition, we are watching the yield curve of high quality corporate debt. The difference between the 10-year corporate bond and the 2-year corporate bond did not invert prior to the dot-com bubble and global financial crisis in 2008. The corporate yield curve did invert prior to the recession in the early 1990s. This will be another indicator we monitor to see if the corporate bond curve continues to flatten.
We’re keeping an eye on developments in the financial markets and will keep you informed.
MARKET AND ECONOMIC NEWS
Global stocks declined last week as the Trump administration’s rhetoric and proposals regarding global trade continued to concern investors. OPEC indicated it would increase oil production less than expected, and oil prices climbed between 3 percent and 5 percent depending on the market. General Electric (GE) was removed from the Dow Jones Industrial Average after months-long underperformance. GE was the last of the original companies still included in the index, dating back to its formation in 1896. It will be replaced by Walgreens Boots.
The trade dispute between the United States and China continues to worsen. So far, the effect on consumers has been minimal because the Trump administration has targeted intermediate goods purchased primarily by businesses. Eventually, however, those costs will be passed on to the consumer. With the proposal of additional tariffs on $200 billion in Chinese goods, and possibly as much as $400 billion if China retaliates, consumers will likely see price increases in consumer products ranging from clothing to electronics. One consumer product has already seen a price hike – washing machines have risen 17 percent since January.
The accompanying chart below shows a list of consumer goods that could see price increases going forward. A possible 10 percent tariff could be placed on the next round of products, which include furniture and electronics. In particular, smartphones could be the most significant target as 70 percent of cell phones are assembled in China.
KEY POINTS FOR THE WEEK
- Further risks of trade disputes pushed stocks lower.
- Oil prices rose after OPEC’s production increases were lower than expected.
- General Electric was removed from the Dow Jones Industrial Average.
FLAG FACTS FOR THE FOURTH
On July 4, 1776, the Second Continental Congress formally adopted the United States Declaration of Independence. The American Revolutionary War, which began in 1775, continued until 1783 when the British Empire abandoned their claim to the United States. Like the war, the American flag took many years to become what flies so proudly today. Here are some parts of that journey:
- During the Second Continental Congress in Philadelphia on June 14, 1777, the following resolution was adopted:
Resolved, that the flag of the United States be thirteen stripes, alternate red and white; that the union be thirteen stars, white in a blue field representing a new constellation.
The resolution was vague on instructions such as how the stars should be arranged and how many points the stars should have. This caused flags to be created differently across the 13 states with some flags scattering the stars without any specific design and others arranging the stars in rows or circles. The stars were also not consistent as some had six points and others had eight.
- Elizabeth (Betsy) Ross made flags for over 50 years and is cited as making the first Stars and Stripes although no proof actually exists that hers was the first. Many other patriots created flags for the new Nation as well: Cornelia Bridges and Rebecca Young of Pennsylvania, and John Shaw of Annapolis, Maryland.
- As new states were added to the Union, a new bill was accepted by President Monroe on April 4, 1818, requiring that the flag of the United States have a union of 20 stars, white on a blue field, and that upon admission of each new State into the Union one star be added to the union of the flag on the fourth of July following its date of admission. The 13 alternating red and white stripes would remain unchanged.
- By 1912, the stars totaled 48 with the last two stars being added in 1959 (Alaska) and 1960 (Hawaii). Executive Order No. 10834 issued by President Eisenhower on August 21, 1959, created a new arrangement of the 50 stars which became the official flag of the United States which still flies today. The flag was raised for the first time at 12:01 a.m. on July 4, 1960, at the Fort McHenry National Monument in Baltimore, Maryland.
This Fourth of July, we hope you and your family enjoy the many freedoms symbolized by our flag. As you think about your financial freedom, please let us know what we can do to be of assistance.
WHAT ARE WE READING?
Below are some articles we paid particularly close attention to this week. We encourage our readers to follow the links.
On October 10, 2017, the Montgomery County Council adopted zoning text amendment (ZTA) 16-03 and Bill 2-16 to define short-term residential rentals and to establish standards and licensing regulations. The law will become effective July 1, 2018. Property owners currently advertising short-term rentals are being notified about the process for bringing the property into compliance with the new law. If you operate a short-term rental property and you do not receive a letter, you are still required to apply for a license and meet licensing requirements. The maximum number of adult overnight guests per short-term rental is six and the maximum number of adults per bedroom is two. Read further for exceptions and how to apply for and pay the new tax and license fee.
Common wisdom is to target savings at least 20% of your pre-tax income for future retirement needs. A less common tool is simply working longer to meet a retirement funding shortfall. Working 3 to 6 months longer is equal to saving an additional 1% of your income for 30 years. However, be cautious about not saving enough now if you are young and banking on working longer because outside events may not allow you to work as long as you had planned.
Many investors have wondered where the bear has gone during the long bull market that started in 2009. We may have tracked it down, at least temporarily. A bizarre event occurred in Lake Tahoe last week as a bear found itself stuck inside a Subaru Outback. No one quite knows how the bear got into the vehicle, but they do know it was trapped. The interior was so badly destroyed, the doors could not be unlocked. A brave Placer County deputy broke the window to help the bear escape.
YOU KNEW CARROTS WERE GOOD FOR YOUR EYES
Newly discovered use for the orange veggie may help farmers and/or food processing companies find a new source of revenue. That’s because carrots can make concrete stronger – and so do sugar beets.
Engineers at Lancaster University in the United Kingdom are infusing nano platelets from discarded carrots and root vegetable peels into concrete. This strengthens the material in an environmentally friendly way. Durability + Design reported:
“These vegetable-composite concretes were also found to out-perform all commercially available cement additives, such as graphene and carbon nanotubes and at a much lower cost…The root vegetable nano platelets work both to increase the amount of calcium silicate hydrate – the main substance that controls the performance of concrete – and stop any cracks that appear in the concrete.”
The Economist reported adding 500 grams of platelets reduced the amount of cement required to make a cubic foot of concrete by 10 percent. In addition to reducing the amount of building material needed for a project, carrot concrete also reduces CO2 emissions.
Another natural material is getting a makeover, too. Researchers at the University of Maryland are refining processes that make wood stronger than steel, reported Scientific American. It may compete with titanium alloys and have applications beyond building:
“A five-layer, plywood-like sandwich of densified wood stopped simulated bullets fired into the material – a result Hu and his colleagues suggest could lead to low-cost armor. The material does not protect quite as well as a Kevlar sheet of the same thickness, but it only costs about 5 percent as much, he notes.”
“A person with a new idea is a crank until the idea succeeds.”
~ Mark Twain, American author and humorist
“People who love what they do wear themselves down doing it, they even forget to wash or eat. Do you have less respect for your own nature than the engraver does for engraving, the dancer for the dance, the miser for money or the social climber for status? When they’re really possessed by what they do, they’d rather stop eating and sleeping than give up practicing their arts.”
“It’s not fun to fail, but it just might be the only way to succeed.
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. 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.
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