Thursday, April 4, 2019

Monthly Market Insights: April 2019 | Signals

Spencer Joyce, CFA
Author position
Vice President | Markets Analyst


I was driving to work this morning. A traffic light turned from green, to yellow, to red. I stopped the car. Without much ado, I responded to a signal. Signals are indeed all around us: a ringing phone, someone smiling, a headache or a toothache, perhaps a strong rally for an investment, and of course our alarm clocks each morning! Signals impart information, lend order, and add convenience to our lives. We are trained to look for them, and we are conditioned to respond to them.

It is important however, to respond only to legitimate signals in the correct fashion. Sometimes this is easy (e.g., reading facial expressions). But often when the stakes are highest, as is the case with matters of our health and financial well-being, reading signals is downright difficult. We will leave the X-rays to the MDs, but here in Strategy & Research, we are honored to help you understand and react to signals in global financial markets. An “inverted” yield curve is one such signal where we must be diligent.

What is an Inverted Yield Curve? An inverted curve means that long-term interest rates are lower than short-term rates. This would be like the interest rate on a 30-yr mortgage being lower than the interest rate on a 15-yr mortgage. Goofy right? Indeed, this type of relationship should not exist, but each US recession since WWII has nonetheless been preceded by inversion of the Treasury curve. As such, we are not surprised that March’s inversion seemed to spook markets and incite a media frenzy. But it is not a signal to abandon or alter our long-term financial strategies (i.e., do not panic).

Do inversions cause recessions? No! Inversions merely reflect a market view that growth and inflation may be lower at some point in the future. Sometimes this view is correct, other times it is not. The curve has inverted 11 times since the mid-60s, but there have only been 7 recessions. As we say here in Strategy & Research, “It doesn’t have to rain (recession), just because of clouds (inversion).”

Should I buy or sell stocks because of an inversion? We all know equity markets have ups and downs, but inversions are an awful tool for timing them. Some of the best interim periods for stocks post-WWII occurred after inversions, while other times the market actually peaked before an inversion. It is perhaps worth remembering that last month’s inversion occurred during the best quarter for stocks since 2009.

The single most important response to the yield curve signal is to lean on your established long-term financial plan. Our minds are trained to make quick decisions, but our financial plans give us a roadmap to make prudent decisions. Diversification optimizes risk in all market environments, and a rebalancing plan will help us benefit when other investors misread market signals.

– Spencer E Joyce, VP, CFA

Name to Know for April

Juan Guaido

Opposition Leader, Venezuela

Juan Guaido assumed the Presidency of Venezuela in January of this year, attempting to wrangle power from Nicolas Maduro. Mr. Guaido has been recognized as the legitimate leader of Venezuela by the United States and a host of western countries. Russia and China still recognize Maduro, who also retains control of the military.

The power struggle is weighing on the nation’s oil sector. Production and exports have plummeted, helping support global oil prices without cuts from other OPEC nations. The political strife also has the potential to be a meaningful proxy battle between the United States and Russia.

Markets Rundown

US Equities: The S&P 500 gained 1.9% last month. Jan-Mar 2019 was the strongest quarter since 2009.

Global Equities: Both developed and emerging market stocks posted gains in March, rising 0.6% and 0.8%, respectively.

Federal Reserve: The Fed left rates unchanged at its March 20 meeting, its first quarterly pause since September 2017. Futures imply a 60% chance of a rate cut in 2019.

US Treasuries: For a brief period, the 3-mo Treasury rate was above the 10-yr, marking a first “curve inversion” since prior to the Great Recession.

US Credit: Investment Grade and High Yield corporate bonds yield an average of 1.33% and 3.77% over Treasuries, respectively. Spreads were little changed last month.

Markets Rundown Source: Bloomberg

Important Disclosures

Each client’s investment needs, risk tolerance, and goals are different. This newsletter is not meant to be advice for any specific investor. Nothing in it should be construed as an offer to sell, or a solicitation of an offer to buy, any securities. This should not be used as the sole basis for an investment decision. Any opinions or estimates are subject to change without notice. For information about how any of this information applies to your per­sonal financial situation, please contact your Wealth Advisor.

Past performance is not a guarantee of future results.

Although the information provided to you in this newsletter was obtained or compiled from sources that we believe are reliable, J.J.B. Hilliard, W.L. Lyons, LLC, A Baird Company, cannot, and does not, guarantee that the information or data is accurate, timely, valid, or complete.

All investing involves risk, including the possible loss of principal. You should carefully consider investment objectives, risks, charges, and expenses of any investment before investing. Diversi­fication and asset alloca­tion do not guarantee a profit or guarantee against a loss.

Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market or economic developments. The bond market is also volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect can be more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks.