Broker Check

Yellow Flashing Lights

August 14, 2019
Headlines, headlines, headlines…Lately this is what has been moving the market. While we have been meandering through earnings season the fundamentals of companies are being disregarded from the sentiment that drives the market, instead being driven by events much less predictable.  After last weeks violent sell off, to the oversold conditions that we mentioned, it only took one tweet from President Trump citing a delay in the 10% tariffs to rally the S & P 500 back upward.  The delay was cited as being set to help US consumers make purchases through the Holiday shopping season.  Markets rallied being lead by companies like Apple and Amazon before immediately having the rug pulled out from beneath them the following day as the second headline made its appearance. 
‘Inverted Yield Curve Sends Recessionary Signals’ was a common print in news outlets around the world the wee hours of Wednesday morning.  Yield curves are the relationship between short and longer duration bonds.  When curves are normal, longer duration bonds have a higher yield than their shorter counterparts as investors demand a higher return for having their money tied up for a longer period. When this relationship inverts it is regarded as cautionary and has been a precursor for predicting US recessions 9 out of the last 12 times.  While the inversion has been correlated with recessions it has not done as good a job timing them, with recessions occurring as few as months and as long as 2 years after the signal.  
Many of you have heard our analogy about the yellow light decision: the stop light turns yellow and you have to pick between applying the brakes or hitting the gas.  In this instance we are taking this signal as such.  We know the US economy is the strongest of the world economies, we know that earnings season has been relatively solid, and we now believe that the Federal Reserve is more likely to be accommodative with their interest rate policy. These factors would keep us from making any rash moves to our strategy of still picking solid companies in oversold conditions.  That being said, when we consider a longer time horizon, a slow shift in strategy might be appropriate as we look for companies that have proven their resilience through similar scenarios. 

For more reading on Yield Curves we would recommend this link from Investopedia: