November 2019 Market Insight

What happened in November?
U.S. stocks continued to have positive returns. Large cap stocks, measured by the S&P 500 were up 3.63% in November. Small stocks, measured by the Russell 2000 were up 4.12%. International stocks, measured by the MSCI World ex-US index, were also up 1.25%. Bonds, measured by the Barclays US Aggregate Bond index, were down -0.05%.

What is your investment team paying the most attention to this month?

• The yield curve has stopped flattening
• Interest rates have stopped going down
• News such as the Trump tariffs and impeachment inquiry have not negatively affected markets

The Yield Curve Has Been Flattening For Ten Years

The above graph shows the difference between the interest paid on a ten-year Treasury bond and a two-year Treasury bond. In 2010, investors could have made almost 3% more in yield by investing in a ten-year Treasury instead of a two-year Treasury. This is normal. After all, longer bonds should yield more, given the additional potential risks. Since 2010, this premium has slowly eroded until 2019 when it disappeared entirely. This means that investors could no longer make higher returns by investing in a longer-term bond.

Another way of saying this is, the Treasury yield curve has flattened considerably over the past ten years. There are a couple reasons for this: the Federal Reserve has raised shorter-term interest rates over this time frame, and long-term interest rates have decreased while economic growth has remained steadily below longer-term averages.

Interest Rates Have Stopped Going Down
The next graph shows the ten-year Treasury rate over the same time frame:

Historically, the yield curve has not stayed flat or inverted for very long, because in normal economic environments, longer-term bonds have higher rates of interest than shorter-term bonds. Because of this, there is potential for the ten-year Treasury rate to go up. It recently reached a low of 1.43% on September 3rd, and has since reversed and started going higher. This is a positive development, reducing the risk of an economic recession in the short term. The graph also shows that in 2012 and 2016, the ten-year yield reached similarly low levels. Both times, yields then stopped going down and started going up. When the yield curve is flat, but potentially steepening, and interest rates are potentially rising, we will tend to invest in shorter-term bonds in your account for two reasons. First, there is little income to be gained by investing in longer term bonds. Second, when interest rates rise, bond prices go down.

The Market is Going Up Despite Bad News
The negative news surrounding both the impeachment inquiry and President Trump’s tariffs on China has persisted into November. While these items, particularly surrounding the tariffs, have had a negative impact on the markets over the past two years, their effect seems to be diminishing, possibly because:

• Markets are complex, so attributing performance to only a few factors can be overly simplistic
• News cycles are shortening, and market participants either develop fatigue or adjust their future expectations accordingly
• Over longer periods, markets tend to shrug off problems and continue to go up

In Summary
Stock markets across the world had positive returns in November, with U.S. stocks outperforming international stocks. We continue to pay close attention to the general direction of interest rates, which may be increasing, as well as the shape of the yield curve, which may be steepening. We will also monitor global economic and political developments, but their impact on how we invest your assets will be minimal.

We hope you have a great December. We wish you a Merry Christmas and a Happy New Year!