The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations
for any indicual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Indexes are unmanaged and cannot be invested into directly.
Economic forecasts set forth may not develop as predicted.
Investing in stock includes numerous specific risks including: the flection of dividend, loss of principal and potential illiquidity of the investment in a falling market.
Investing in special market and sectors carries additional risks such as economic, political, or regulatory developments that may affect many or all issuers in that sector.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S.-based common stocks listed on the NASDAQ stock market. The index is market-value weighted. This means that each company’s security affects the index in proportion to its market value. The market value, the last sale price multiplied by the total shares outstanding, is calculated throughout the trading day and is related to the total value of the Index. It is not possible to invest directly in an index.
The Dow Jones Industrial Average Index is comprised of the U.S-listed stocks of companies that produce other (non-transportations and non–utility) goods and services. The Dow Jones Industrial Averages are maintained by editors of the Wall Street Journal. While the stock selection process is somewhat subjective, a stock typically is added only if the company has an excellent reputation, demonstrates sustained growth, is of interest to a large number of investors and accurately represents the market sectors covered by the average. the Dow Jones averages are unique in that they are price weighted; therefore their component weightings are affected only by changes in the stocks’ prices.
The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
This research material has been prepared by LPL Financial LLC.Securities offered through LPL Financial LLC. Member FINRA/SIPC.

November 2019 Client Letter

November 7, 2019

Dear Valued Investor:

Turning the calendar from October to November brought more than trick-or-treaters, pumpkins, and leaves to rake. It also brought a wave of important economic updates that delivered more treats than tricks and helped the stock markets reach new highs.

Those new highs may be causing you to feel a bit wary, however, wondering if the end is nearing for what is now the longest bull market ever recorded. Should new highs be feared or embraced? Since 1980 the S&P 500 Index historically has generated above-average returns one year after reaching a new high. New highs have been a normal by-product of bull markets, and we should expect to see more.

There are several reasons to expect this bull market may deliver more new highs in the months ahead. Overall, the U.S. economy remains on solid ground with no sign of imminent recession. Gross domestic product for the third quarter came in better than expected despite businesses’ weak capital investment related to the U.S.-China trade conflict. The consumer remains the anchor of the U.S. economy, as shown in recent strong consumer spending data. Job growth in October was solid, even when considering the General Motors strike (which is over), and wages continued to rise.

Recent trade headlines also reflect encouraging progress. President Trump and China President Xi likely will sign a preliminary trade agreement within the next month or so. The most contentious issues will need to be worked out in future negotiations, but any de-escalation of the current trade tensions will be welcome. Resolving the trade dispute may encourage companies to invest more, which could drive stronger economic growth and corporate profits and help push stocks higher.

Doing its part, the Federal Reserve (Fed) gave investors what they were hoping for and cut interest rates for the third time this year. Stocks historically have responded well one year after cuts that were also characterized as a “gradual mid-cycle rate adjustment.”

We are entering what historically has been the best performing six months of the year for stocks. When we add that positive seasonal factor to the overall good health of the U.S. economy, support from the Fed, and progress on a trade agreement, it appears this bull market may have more left in the tank. At the same time, we cannot dismiss potential risks to markets, most notably the possible unraveling of the U.S.-China trade pact, lackluster economic growth in Europe and Japan, stalled corporate profit growth, and the potentially contentious upcoming U.S. presidential election campaign. After a relatively calm and steady stock market advance this year, a pickup in market volatility would be totally normal.

We should continue to watch for signs of excesses in the economy that could lead to a recession and bring this record bull market to an end. For now, there don’t appear to be any worrisome cracks in a strong economic foundation, and the backdrop for stocks appears to remain favorable.

Please contact me if you have any questions, and have a very happy Thanksgiving.

Sincerely,

Wayne Rigney

 

________________________________

 

Important Information

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.

The use of Stocks and Markets herein are referencing corresponding indexes, unless otherwise noted. All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

Economic forecasts set forth may not develop as predicted.

All data is provided as of November 1, 2019.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

October 2019 Client Letter

October 3, 2019

Dear Valued Investor:

Summer has turned to fall, and there’s already a little chill in the air. Three-quarters of the year is behind us now, and both stock and bond markets have had a strong year so far, although we expect to see regular—but normal— bouts of volatility as we progress through the fourth quarter. In its first week October has lived up to its reputation as a volatile month, but it’s important to keep in mind that October actually has been the third strongest month on average for the S&P 500 Index for the past 20 years. There are several key factors to watch the rest of the year as the weather continues to cool and end-of-the year activities heat up.

Trade and impeachment have garnered a lot of the headlines recently, but behind the scenes the U.S. economy has remained resilient. Economic data has been increasingly beating expectations. The most recent data points to third-quarter economic growth that’s consistent with the long-term trend of the current expansion, which is now more than a decade long.

Trade headlines have improved in recent weeks. U.S. and China negotiators are scheduled to meet October 10, and the Chinese recently began purchasing U.S. soybeans and pork products again. Reports that the United States would curb U.S. investment in China surfaced and were quickly refuted by the White House. Finally, with the 70th anniversary of the People’s Republic of China behind us, China’s leadership may be in a better position to strike some sort of a trade deal. Even a limited agreement could help shore up business and investor confidence.

While the impeachment process will receive a lot of press attention, it is not expected to have much impact on the economy or markets. The main risk is that the political discourse may harm investor confidence.

Recession fears have heightened recently following a soft September report on U.S. manufacturing from the Institute for Supply Management. Domestic manufacturers continue to struggle with slowing international growth, tariffs, and a strong U.S. dollar. It’s important to note, however, that manufacturing comprises just 12% of the U.S. economy based on gross domestic product, while consumer spending contributes nearly 70%. U.S. consumer spending remains in good shape with low unemployment and rising wages.

Overall, fundamentals for the U.S. economy remain favorable despite trade uncertainty and increasing political risk in Washington, D.C. U.S. economic data has been exceeding expectations, and consumers continue to benefit from a solid labor market. With further progress on trade possible in the months ahead and more Federal Reserve rate cuts anticipated, this bull market may have room to run.

Please contact me if you have any questions, and enjoy the autumn weather.

Sincerely,

Wayne Rigney

 

 

______________________________________

Important Information

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

Economic forecasts set forth may not develop as predicted.

All data is provided as of October 1, 2019.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

September 2019 Client Letter

September 4, 2019

Dear Valued Investor:

The Dog Days of Summer were on full display this past month, as a variety of concerns pushed stocks and bond yields lower. After reaching new record highs in late July, the S&P 500 Index dropped approximately three percent in August as trade concerns pressured investor sentiment around the world. Impacts of U.S.–China trade tensions reverberated throughout the economy and financial markets in recent weeks, including weakening global manufacturing data and plunging sovereign interest rates. As a result, safe-haven assets like gold, government bonds, and utilities outperformed in August.

Escalating trade tensions early last month dashed hopes of a quick resolution.  Both sides need to show strength as China is dealing with protests in Hong Kong and preparing for the 70thanniversary of the People’s Republic of China this October, while President Trump is gearing up for the U.S. presidential election.  While global manufacturing has borne the brunt of the trade damage, the latest round of tariffs will impact more consumer goods.

Fortunately, the U.S. consumer remains in good shape, bolstering the economy. The unemployment rate is low, wages are rising, and debt as a percentage of disposable income remains near four-decade lows. Personal spending has driven U.S. output, which during the first half of 2019 remained slightly above the average for the economic expansion.  We believe the key to sustaining growth is renewed strength in business investment, which likely requires progress on trade.

The inverted U.S. Treasury yield curve reflects these uncertainties. An inversion occurs when short-term interest rates exceed longer-term rates and typically indicates pending economic weakness, or recession. Considering the relative strength of the U.S. economy and expected interest rate cuts from the Federal Reserve (Fed), we’re not convinced recession is imminent. Instead, we believe the shape of the yield curve reflects a run on U.S. Treasuries based on the global search for yield. More than $17 trillion in global sovereign debt offers negative yields, where lenders pay borrowers for the “privilege” of loaning them money.

Another message sent by the yield curve is that monetary policy is too tight given trade uncertainty, so the Fed needs to respond promptly with lower interest rates. Of course, we will have a recession someday, and now that we’re in the longest expansion ever, anticipation is high. Yet reviewing fundamentals, even with trade, we’re hard pressed to project contraction soon. It is conceivable, though, that a variety of global events, including the uncertainty of trade and the U.S. election, may cause businesses and consumers to “sit this one out” in the fourth quarter of 2020 and the first quarter of 2021. We assign odds of that recessionary scenario at 1 in 3.

In conclusion, fundamentals of the U.S. economy remain solid even as trade uncertainty weighs on investor sentiment. We would interpret the yield curve inversion as a signal that the Fed is too tight, not of imminent recession. Also keep in mind that stocks have historically performed well in the 12 to 18 months following inversions. We recommend suitable investors continue to focus on economic and market fundamentals while maintaining diversified portfolios. If you have any questions, please contact your trusted financial advisor.

Sincerely,

Wayne Rigney

 

 

 

 

IMPORTANT INFORMATION

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

All performance referenced is historical and is no guarantee of future results.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

Economic forecasts set forth may not develop as predicted.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

U.S. Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. They are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, geopolitical events, and regulatory developments. The gold market is subject to speculation and volatility as are other markets.

Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market. Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

Tracking #1-819896 (Exp. 09/20)

August 2019 Client Letter

August 1, 2019

Dear Valued Investor:

This summer has been interesting. Thus far, temperatures have been at a maximum for much of the country, while typical summer storms have been at a minimum. A parallel can be drawn for the financial markets: Major stock indexes are hovering near record levels, while other asset classes like bonds and gold have also participated in gains with little volatility in recent weeks.

In a normal economic environment, stocks, bonds and gold typically do not experience simultaneous growth. But, these are not normal times:  Domestic economic growth is steady, global demand is weakening, trade uncertainty prevails, and central banks around the world are once again lowering interest rates—more than 10 years after the economic and financial crisis!

Indeed, the U.S. economy has exhibited trend-like growth around 2.5% for the first half of 2019. Despite weaker business investment due to trade uncertainty, growth has been supported by a fully employed consumer. These trends have led activity in the developed world, where Europe struggles with Brexit, and Japan, where demand is wobbly ahead of the looming consumption tax. Yet global investors have found favor with risk assets. Is this a sign of confidence in global economic activity? Or is it reflective of a mindset that believes the world’s central banks will come to the rescue again, lowering rates to boost global demand and support asset prices?

While we’d like to believe it is due to confidence, we suspect it is more of a mindset. For example, the U.S. Federal Reserve just reduced interest rates by one quarter of a percentage point (0.25%), and indications are that at least one more rate cut is coming before year-end. The European Central Bank and the Bank of Japan also have committed to more accommodative policy actions. Lower interest rates can boost economic activity by reducing financing costs for home and auto loans, while also factoring into improved valuations of financial assets.

Unfortunately, the uncertain international trade situation has caused businesses to limit investment, pressuring global growth. Until clarity on trade emerges, markets will probably focus on decreasing interest rates, rather than increasing activity. This may lead to temporary bouts of volatility, potentially weighing on asset prices and investor sentiment.

It’s important to continue to focus efforts on the underlying fundamentals supporting economic activity—and remember that while the economy is slowing, it is still growing. Solid economic prospects can help keep corporate profits afloat, especially if there is progress in U.S.-China trade talks and rebounding global activity.

Please contact me if you have any questions, and enjoy the rest of the summer.

 

Sincerely,

Wayne Rigney

 

 

Important Information

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

Economic forecasts set forth may not develop as predicted.

All data is provided as of August 1, 2019.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

Tracking #1-878588 (Exp. 08/20)

 

June Client Letter

Dear Valued Investor:

Trade tensions have interrupted an unusually calm year in U.S. stocks. In May, the S&P 500 Index fell from an April 30 record high as the United States and China failed to reach a trade deal and escalated tariff tensions. The United States also proposed new tariffs on Mexico, further complicating the outlook for trade. The turnaround in trade talks has surprised investors and rattled global financial markets.

While a resurgence in trade tensions is unnerving, investors should pause and consider the fundamental implications of increasing tariff rates. Higher tariffs and other retaliatory measures could potentially weigh on economic activity and inflation, but the escalation is not expected to derail this expansion. In the worst-case trade scenario, gross domestic product (GDP) growth could be closer to 2% this year. While slower, that pace of growth is largely consistent with the average pace over the last decade.

It’s still possible that the United States and China can avoid further trade escalation, since it appears the bulk of the agreement is already in place. The United States and China are expected to reach some kind of a trade agreement—or at least a trade truce—in the next few months. And trade issues with Mexico likely will be resolved sometime this summer.

There has been a lot of fear-based decision-making in markets. Some nervousness is understandable, but current concerns on tariff impacts look overblown. Most likely there may be more bouts of volatility ahead as President Trump and China President Xi pursue a new path to compromise. In the end, look for a deal that should help support continued growth in the United States and global economies.

Some stock market weakness after such a strong start to the year was to be expected. While it’s felt like a turbulent month, the S&P 500’s decline has been relatively modest compared to previous experiences.

The U.S. economy continues to grow at a solid pace, and job creation is steady. Wages are rising at a healthy rate, and some benefits of tax reform and fiscal spending are still supporting demand. Earnings growth also has been better than feared, and S&P 500 companies have the potential to exceed low profit expectations the rest of this year. Ultimately, earnings growth and solid fundamentals could drive the S&P 500 to new highs later in 2019.

It’s important to remember that stocks’ rally is still intact, and pullbacks like the most recent one are normal events over the long term. While near-term volatility can be uncomfortable, it has helped curb excesses in the markets and sustain healthy sentiment, allowing for what is now the longest bull market on record. Volatility may also provide opportunities for suitable investors to rebalance, diversify portfolios toward targeted allocations, or add to equity positions.

If you have any questions, please feel free to contact me.

Sincerely,

Wayne Rigney

 

 

 

Important Information

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

Economic forecasts set forth may not develop as predicted.

All data is provided as of May 31, 2019.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.

This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

Tracking #1-860638 (Exp. 06/20)

May 2019 Client Letter

May 2, 2019

Dear Valued Investor:

If it seems like the financial markets have been off to an unusually strong start to the year—you are correct. The S&P 500 Index has risen for four consecutive months, resulting in the strongest start to a year in more than 30 years! To be fair, the early gains included recovery from oversold market conditions in December, but a steady combination of monetary policy, economic performance, and corporate profitability have pushed the S&P 500 to record levels.

While we’re pleased with the new highs, it’s also important to keep an eye on what could temporarily disrupt solid market performance. Three key areas when making investment decisions are market fundamentals, technicals, and valuation. A review of each suggests the market can continue to provide longer-term opportunity, but with the possibility for shorter-term volatility. In any event, it’s important for suitable investors to diversify their portfolio strategies to best take advantage of market conditions.

Market fundamentals remain encouraging. U.S. economic data have been steadily improving in recent months, with signs of stabilization in manufacturing and gains in employment, personal spending, and business investment. In addition, the Federal Reserve appears set on keeping interest rates at current levels for the near future, allowing market interest rates and fiscal tailwinds to help support domestic activity. This has been a healthy offset to concerns of slowing global growth, with a potential U.S.-China trade deal remaining the wild card.

Market technicals, which include sentiment, pricing, and volume patterns, currently indicate solid momentum, while a variety of industry surveys suggests investors have a healthy balance between appreciation and skepticism of the recent market gains. Although the S&P 500 recently hit a new high, it took more than six months to exceed its previous record set last September. Historically, when the S&P 500 has had at least a six-month “pause” between records, returns over the following 12 months were above average, which may indicate good news for summer markets.

The third important criteria is market valuation. Rather than simply looking at the price-to-earnings ratio (P/E) when making equity investment decisions, it’s also important to look at the P/E relative to the current level of interest rates and inflation, which both remain well below historical averages. As a result, although the market may be trading at record levels, it doesn’t appear to be overvalued.

It’s been quite a run for equity markets in the first four months of 2019. A quick review of market fundamentals, technicals, and valuation suggests a near-term pullback may be possible. However, suitable investors could use volatility as an opportunity to rebalance diversified portfolios or add to current positions to help work toward long-term investment goals.

If you have any questions, please feel free to contact me.

Sincerely,

Wayne Rigney

________________________________

Important Information

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.

Economic forecasts set forth may not develop as predicted.

All data is provided as of April 30, 2019.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

Tracking #1-849032 (Exp. 05/20)

April’s Bullish History

April 4, 2019

 

Dear Valued Investor,

Seasonality could be on the bull’s side, especially after U.S. stocks’ best first quarter in 20 years.

As shown in the LPL Chart of the Day, April has consistently been one of the strongest months for U.S. stocks. Over the past 20 years, April has actually been the best month of the year for the S&P 500 Index, rising 1.7% on average.

April Showers Have Brought Green Stocks1

U.S. stocks’ strength in April has been especially apparent in the current bull market. The Dow Jones Industrial Average (Dow) has closed up in April for the last 13 years, while the S&P 500 has closed up in April for 12 out of the past 13 years. Positive momentum at the start of the year has helped April’s returns: Since 1950, April has closed up 15 of 19 years when January, February, and March were all positive as well, and the average gain in April for those 15 years was 2.6%.

It’s hard to say what has caused positive seasonality at this point in the year. Investors could be heaving a sigh of relief after a typically volatile first quarter, managers could be squaring up portfolios at the start of a new quarter, or the advent of spring and warmer weather could just lighten up everybody’s moods.

However, higher stock prices may be tougher to achieve this April. U.S. stocks just capped a strong rally after a near bear market to end 2018, and a weaker corporate outlook, recession worries, and global headwinds could inhibit markets in the short term.

“April may bring showers, but lately it has brought a lot of green as well,” explained LPL Senior Market Strategist Ryan Detrick. “With the Dow up 13 of the past 13 years in April, this month sure has been kind to the bulls, but 2019 is a new year, and there are always new worries.”

We believe the S&P 500 will eventually push higher through 2019, as we maintain our 3,000 fair value target.

Sincerely,

Wayne Rigney

 

 

 

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

The investment products sold through LPL Financial are not insured deposits and are not FDIC/NCUA insured.  These products are not Bank/Credit Union obligations and are not endorsed, recommended or guaranteed by any Bank/Credit Union or any government agency.  The value of the investment may fluctuate, the return on the investment is not guaranteed, and loss of principal is possible.

 

 

Member FINRA /SIPC

For Public Use | Tracking # 1-838000 (Exp. 04/20)

11 Things You Need to Know About the Yield Curve

Well, it finally happened—the yield curve inverted. Now note that it was the shorter end of the curve that inverted, as the 3-month Treasury bill (and 1-year T-bill) now yields more than the 10-year Treasury for the first time since 2007. This matters because an inverted yield curve is the bond market’s way of saying there is a potential recession on the horizon. “The yield curve inversion is something that nearly everyone is talking about, given its perfect track record at predicting recessions,” explained LPL Senior Market Strategist Ryan Detrick. “At the same time, however, we simply aren’t seeing other areas of the economy that would confirm a recession just yet, so there is more to this story.”

Please note that there is no one true “yield curve,” as the yield curve simply looks at the yields of a shorter-dated fixed income instrument and compares it to a longer-dated one. In fact, the more commonly discussed 2-year/10-year yield curve spread hasn’t inverted, and it is actually above the early December 2018 lows.

Here are 11 things worth considering regarding the yield curve.

  • Each of the past 9 recessions back to the 1950s saw the 1-year/10-year yield curve spread invert approximately 14 months on average before a recession.
  • Although a yield curve inversion preceded all 9 previous recessions, not all inversions led to a recession. For instance, the 3-month/10-year yield curve inverted in 1966 and 1998, with neither leading to an immediate recession.
  • The shorter end of the yield curve has inverted, but the longer end is actually steepening. For instance, the 10-year/30-year yield curve has steepened most of this year. In past recessions, all parts of the curve inverted before a recession took place.
  • Financial conditions aren’t tight, as tight conditions coupled with the yield curve inverting, historically has led to a recession. Investment-grade corporate and high yield spreads remain calm, however, suggesting that not all parts of the bond market are worried about an impending recession.
  • Market participants have fully priced in a Federal Reserve (Fed) rate cut within the next year, potentially further flattening the curve. Should the economy gain steam during the second half of this year (which we think is possible) it will likely avoid a Fed rate cut, which should lead to a steeper yield curve.
  • We have found that a spread between the 3-month/10-year yield curve has become much more predictive of a recession at -50 basis points (-0.50%). So this still is a clear concern, but a marginal inversion may not be so worrisome.
  • Yield curves aren’t always perfect: Japan has had long stretches of inverted curves that didn’t lead to recessions. Additionally, both the United Kingdom and Germany have had inversions without recessions.
  • The fed funds rate has been significantly higher during previous inversions. In fact, the fed funds rate has averaged more than 6% when the 1-year/10-year yield curve has inverted. It is only 2.4% currently.
  • The previous 5 recessions began an average of 21 months after the 2-year/10-year yield curve inverted. Stocks actually did quite well initially after inversions as well, with the S&P 500 Index not peaking until over a year after the inversions and gaining nearly 22% on average at the peak.

An Inverted Yield Curve Isn't Trouble Immediately

  • Various yields around the globe continue to sink, with nearly $10 trillion in global debt now yielding less than 0%. The German 10-year Bund, for instance, is beneath 0% for the first time since 2016. We think this is due more to a concern over the European slowdown, which has forced many to look to the United States as a safe haven for sovereign debt, thus pushing our yields much lower along the way. This concept is discussed in more depth in our latest episode of the LPL Market Signals podcast.
  • As our LPL Chart of the Day shows, the S&P 500 has actually outperformed the average year the previous three times the 2-year/10-year yield curve inverted. To reiterate though, the 2/10 spread hasn’t inverted yet.

S&P 500 Performance After The 2 to 10 Year Yield Curve Inverted

In summary, an inversion on part of the yield curve may suggest trouble ahead for the economy, but don’t forget that economic growth and potential stock market gains can continue for years after the initial inversion. Additionally, with credit markets holding up well, employment still strong, and wages still increasing, we don’t yet see the necessary combination of worries that could suggest a recession is indeed imminent.

 

 

 

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

U.S. Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. They are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

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