The economic contraction around the world has got the investors jittery about the growth prospects in the United States. European markets fell after the German economy contracted by 0.1% in the spring and China’s growth in growth in factory output and retail spending weakened in the month of July. However, the Market's focus, on Wednesday August 14th, was on the inverted U.S. yield curve, which has historically been one of the more reliable recession indicators. When long-term bond yields are lower than short-term yields, the spread is negative and the yield curve is inverted, which means investors are concerned about the long-term growth prospects of the economy. But there is much more underneath the surface of lower yields than what we see. The yields across most of the developed economies are in the negative territory and the US Fed funds rate are among the highest in the developed economies. The flight to the safest haven, the US, and negative interest rates across the world, might be one of the causes of the 10-year yield falling to 3 year low. Nevertheless, we are not ignoring yield curve inversion, but the historic precedent for equity market returns post the yield inversion is bullish rather than bearish.
According to Bank of America, In the last 10 inversions, from 1956 to present, the S&P 500 hit highs within three months six times and the other four times there was a yield curve inversion, it took 11 to 22 months for the S&P 500 to peak.
It doesn't mean the analysts are predicting an immediate S&P 500 meltdown or saying that growth isn't possible in the near term. In some cases, according to a note from Bank of America, the S&P 500 has rallied — an average of 16.7% — before falling in a "recession-related drawdown. So, there could be new high ahead for the S&P 500 before any downturn happens. If the economy goes into recession the average correction is close to 32% and it tends to last somewhere between 14 to 15 months. I think the biggest stabilizing factor for the markets could be a trade deal with China (soon) and Federal reserve rate cut. But that might not be the panacea for all our global economic problems. We will continue to monitor the financial market conditions and keep you abreast of further developments.
If you still have further questions about your investments, please feel to contact your Financial Advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings. Stock investing involves risk including loss of principal. Portions of this material were prepared by LPL Research. The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index. The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of the following developed country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the UK. The MSCI EM (Emerging Markets) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of the Americas, Europe, the Middle East, Africa and Asia. The MSCI EM Index consists of the following emerging market country indices: Brazil, Chile, Colombia, Mexico, Peru, Czech Republic, Egypt, Greece, Hungary, Poland, Qatar, Russia, South Africa.Turkey, United Arab Emirates, China, India, Indonesia, Korea, Malaysia, Philippines, Taiwan, and Thailand. The Bloomberg Barclays U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds. The FTSI Nareit All REIT Index is a market capitalization-weighted index that and includes all tax-qualified real estate investment trusts (REITs) that are listed on the New York Stock Exchange, the American Stock Exchange or the NASDAQ National Market List. The S&P GSCI is a composite index of commodity sector returns which represents a broadly diversified, unleveraged, long-only position in commodity futures. The S&P GSCI is intended to provide exposure to broad-based commodities