Tough day for stocks. After their best week of the year last week, followed by healthy gains on Monday, major indexes did an about-face and fell more than 3% yesterday. Several catalysts drove traders to the sidelines (and into Treasuries): Inversion at the short end of the yield curve heightened recession fears and weighed on financials. In addition, the latest headlines from Washington, D.C. suggested President Trump’s successful characterization of what was agreed to with China may have been overstated. Additional details have been scarce and those that were available have conflicted, leading to doubts about whether 90 days is enough time to solidify meaningful terms. Profit taking likely also played a role after such strong gains last week.
Keep in mind that volatility is normal. Though never pleasant, volatility is a sign of healthy, functioning markets. It’s hard to ignore the short-term swings, and we don’t want to be dismissive of the risks, but when focusing on market fundamentals, we continue to like stocks here and think our S&P 500 Index year-end fair value range of 2900-3000 is still reasonable. We encourage investors to remain focused on long-term goals.
Yield curve fears escalate. With the short end of the Treasury yield curve inverting this week (2-5 year and 3-5 year) for the first time since 2007, many investors are wondering whether a recession could be forthcoming. However, it’s important to note that neither of these measures of yield curve steepness have been reliable precursors to recessions. We think this move may be better interpreted as a market signal to the Federal Reserve (Fed) that it needs to temper the pace of its rate hikes in 2019. As a recession indicator, the most reliable yield curve spreads have been those with larger maturity gaps, such as 2-10 year. Also, consider the yield spread between three month Treasury bills and 10-year notes remains above 50 basis points, implying the Fed may have room for at least two more hikes without potentially inverting the more predictive curve measures.
Today on the LPL Research blog, we’ll take a closer look at the yield curve and show why history says there still could be ample time for this economy to continue to grow.
Monitoring the Week Ahead
- ADP Employment Report (Nov)
- Markit US Services PMI (Nov)
- ISM Non-Manufacturing Index (Nov)
- Fed Beige Book
- Trade Balance (Oct)
- Initial Jobless Claims (Dec. 1)
- Durable Goods Orders (Oct)
- China Foreign Reserves (Nov)
- University of Michigan Sentiment Index (Preliminary, Dec)
- Jobs Report (Nov)
- Japan Leading Index (Oct)
- Germany Industrial Production (Oct)
- Eurozone GDP (Q3)
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.
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 company names noted herein are for educational purposes only and not an indication of trading intent or a solitication of their products or services. LPL Financial doesn’t provide research on individual equities.
All performance referenced is historical and is no guarantee of future results.
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.
Index data obtained via FactSet
For Public Use – Tracking #1-799475 (Exp. 11/19)