The Trade War Drags on and the Yield Curve Inverts

By Tim Hilterman, CFP, CAP, Investment Advisor Representative

September 3, 2019

Learn more about what happened in the market in August 2019

August was a mixed bag of emotions as volatility spiked in the market, fueled by trade war escalations (and de-escalations), global growth concerns, and the infamous yield curve officially inverting for the first time since 2007.

IndexAugust2019
S&P 500 Composite (Large Cap)-1.58%18.34%
Russell 2000 (Small Cap)-4.94%11.85%
MSCI World Ex-US-0.24%10.20%
Barclays US Aggregate Bond0.00%9.10%

The Trade War Goes On (and On)
Those following the trade war got whiplash this month. Case in point: the first full week of August. On August 5th it seemed the sky was falling as investors learned China had allowed their currency, the Yuan, to weaken beyond $7/CYN (an 11-year low). Displeased by this, the Trump administration quickly labeled China as a currency manipulator with the International Monetary Fund.1 The move is mainly symbolic, but escalated tensions nonetheless. Speculation that this would break down trade negotiations altogether led to the S&P 500’s worst one-day loss of 2019: closing down 2.98%. But these worries turned out to be short-lived. Four days later, the Chinese government backpedaled, fixing the Yuan higher than expected. The S&P 500 surged up 1.88% to finish the week down only a modest 0.46%.

There was much of the same trade war gyration throughout the month. New tariffs were proposed. Others were postponed. Waivers were granted and more talks were had. The tone of rhetoric regarding trade seems to change with each passing day, but here’s bottom line: this trade war is one of the largest influences on the markets and it’s the most unpredictable. A sign that the U.S. and China are finally making real progress could propel this market to new highs. Conversely, if negotiations continue to break down through the end of the year, we could be in for a difficult start to 2020 and a global slow-down.

Yield Curve Inversion: What does it mean?
Concerns about U.S.-China trade and the negative impact on future growth caused the yield curve to invert this month. (Specifically, the yield on the U.S. 10-year treasury bond is now below the yield on the U.S. 2-year treasury note.) Many have been fearfully watching the yield curve flatten out over the last few years since an inversion is seen by some as a prediction of recession. You can learn more about the yield curve in our article, “A Picture is Worth a Thousand Words: What the Yield Curve Tells Us” from July 2018. (Yes, we’ve been talking about the yield curve inverting for over a year!)

Although an inverted yield curve has often preceded a recession, the time between the inversion of the curve and the next recession has varied: anywhere from 6 months to 2 years. In fact, many times there has been a significant positive surge in the market in the 6 months after the yield curve inverts. This leaves us with these unknowns:

  • When or if a recession will start
  • How well the market will perform before the recession begins
  • The severity and duration of the recession

So what should you do in light of all this?
At the risk of sounding like a broken record, stay invested. But you should make sure your portfolios are properly aligned with your time horizon and risk tolerance. The markets can change quickly and many of our mutual fund managers are holding some extra cash to capitalize on buying opportunities during unexpected downturns in the market. If you would like further clarification, or reassurance that your portfolio is aligned with your goals, call us to set up a meeting. It’s hard to imagine, but Fall is almost here. Have a wonderful September and enjoy the change in seasons!

 

 

1. The I.M.F. is a collaboration of 189 countries designed to ensure the stability of the international monetary system. Upon being label a currency manipulator, China is simply referred to the I.M.F. for discussions. Thus, the label is more symbolic than substantive. Learn more about the I.M.F. here.

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