We hope you are enjoying a good week. Since the markets are front-and-center of the news, we wanted to give you a brief summary of recent events.
As you have probably heard, yesterday was an extremely volatile day in the equity markets. The Dow lost 767.27 points, down 2.9%, and the S&P 500 lost 87.31, down 2.98%.[i]
Most of the discussion around the sharp decline centered on the escalating trade war with China. After President Trump announced last week his largest tariff hikes to date, Secretary Xi and the People’s Bank of China retaliated Monday with countermeasures. In addition to a devaluation of the Yuan against the US dollar, the Chinese government called on state buyers to halt US agriculture purchases. Furthermore, China threatened further reprisal if the US follows through with its threat with expanded tariffs on consumer goods beginning September 1st.[ii]
These threats are taking a toll on US equities, especially consumer goods such as smartphones, clothing, and toys. Technology companies were among the largest decliners, as were bank stocks with their sensitivity to interest rates and currency exchange rates.[iii]
The markets experienced similar volatility last December and again in May of this year when trade-war-rhetoric was intense, only to bounce back strongly after a commitment from both sides to negotiate a solution. For now, both sides are ‘digging in’. China has not bowed to the threats of September tariffs; instead, leaders continue to draw lines in the sand.
As a result, the global bond market has experienced a bump (lower yields and higher prices), while perceived havens such as gold continue to rally. This brings us to another haven… US Treasuries.
What has the attention of many analysts is the inverted yield curve. Yield Curve Inversion has long been interpreted as a leading indicator of an coming recession. History shows that recessions tend to occur several months (if not years) after a Yield Curve Inversion… and there are always circumstances surrounding any recession (i.e. the Tech Bubble and the Financial Crisis).
An inversion occurs when the 10 Year Treasury yields LESS than the 3 Month Treasury. Such an inversion occurred earlier this year, and yesterday the inversion was pronounced. Rates on the 10 Yr sank to 1.74% yesterday, which is 32 basis points less than 3 Mo bills. That spread is the most extreme since before the Financial Crisis.[iv]
Typically, shorter term bills pay lower rates than those with a longer term, much like a CD. Imagine buying a 10-year CD for a lower yield than a 3-month CD. That’s a Yield Curve Inversion, and it what is happening currently in the world of US Treasuries.
Additionally, last week the Federal Reserve lowered the Fed Funds rate by .25. This was highly anticipated and should have served to lower short-term interest rates and possibly stop the yield curve inversion. However, the recent volatility in the equity markets and now the Chinese devaluing their currency has led to the 10- year yield going down by more than the .25% rate cut in the Fed Funds rate. Therefore, the yield curve remains inverted, even after the Federal Reserve action last week.
It remains to be seen if this situation is a leading indicator of recession. What we have learned over the past decade is that the current US Federal Reserve is not afraid to take aggressive action to bolster the economy. Furthermore, we could be just one positive tweet away from the trade war becoming an afterthought.
In any case, our strategy is the same. We have been pleased with our equity allocations. You may have noticed that the best-of-peer funds within the portfolios have enjoyed out performance in relation to the indexes. We continue to evaluate our funds and will not hesitate to make changes to maintain best-of-class management, regardless of fund family.
Additionally, we continue to monitor our price-momentum indicators. Even in light of current volatility, our indicators of long-term price action in the markets remain positive. Should these indicators cross negative, we will evaluate a lightening of exposure, or even an exit. We stand ready to make the move when we feel it is warranted.
Furthermore, we are committed to expanding our alternative portfolios. We are currently working on a Trinity Suite of alternative investments outside the equity and fixed income markets that may be appropriate for certain investors. Our plan is roll out these new offerings before year-end. If you have any questions about this, please do not hesitate to contact us.
As always, feel free to contact us anytime. We would love to hear your thoughts and comments.
Trinity Portfolio Advisors
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