It has not gone unnoticed by us that it has been a rather tumultuous week for the stock market. We have a few thoughts on this that we’d like to share. What seems to be bothering investors most of all now, among an array of factors, is uncertainty over three things: Federal Reserve policy, the U.S.-China trade situation, and (near) inversion of the Treasury bond yield curve that many believe presages a recession. Add to this the impact of algorithmic (computer-driven) trading, and it all adds up to heightened market volatility.
With respect to the above-mentioned concerns, we offer the following thoughts: 1) We believe the probability is increasing that the Fed will materially curtail interest rate hikes in 2019, which should be positive for financial assets. 2) We believe there is a reasonably good chance there will be some positive progress made within the next 90 days on the U.S.-China trade dispute. 3) We believe the concerns over the yield curve possibly inverting may be overdone, but we are watching this. You might recall, we did set an action trigger at our September investment meeting which would cause us to take some protective action in the event the trigger is breached. The trigger is an inversion of the Treasury yield curve (meaning the spread between the yield on the 10-year and 2-year Treasury bond goes negative). As of today’s close this spread is positive, so it has not yet inverted, but we believe investors are concerned or projecting that it will invert.
The bottom line is the market is dealing with a little more uncertainty at the moment. As we stated in our previous commentary, we expect market volatility to remain elevated for a while longer, perhaps into early next year and we would not be surprised to see the stock market go a bit lower as part of a normal corrective process. As we move forward, there are a few key things we want to stress: 1) We have been through this before and corrections (and even mild bear markets) are normal parts of a secular bull market cycle. 2) Your financial plan and investment strategy take market volatility into account. We have selected a customized strategy for you that is diversified across nine asset classes. Only a portion of your assets are in U.S. stocks. The diversification of your portfolio is designed to dampen volatility. 3) We remain confident in the long-term strength and resilience of both the U.S. economy and the stock market and we do not believe there is a need at this time for any unusual or drastic action related to portfolio or investment strategy.
As always, if you have questions or concerns, please contact us.
S.R. Schill & Associates
December 7, 2018