Hello Everyone, Welcome to another edition of CG Insights! This is Matt Pappas on today with a quick update on the markets. There’s been a lot of volatility lately, both in bonds and stocks. Fears of a recession have resurfaced with the yield curve inverting and international economies slowing down.
Let’s start with the topic of recession for a moment. Historically, the yield curve has signaled downturns in the past, but the other key markers like employment, Leading Economic Indicators and sentiment are not showing the same declines. Sure, GDP and corporations have pulled back but both still look healthy. And there are now more available jobs than unemployed people for the first time ever. So, until those other signals take a turn we simply don’t see a recession on the horizon. The Federal Reserve is not tight and in fact just reduced rates for the first time since 2008. Historically, every time the Fed has reduced rates in the absence of a recession, the markets have gone up over the following 3, 6 and 9 months every time! Of about 18% on average.
We’re certainly not predicting that but it’s an important data point. Companies are posting healthy profits, and reinvesting in themselves through R&D and new products; it’s not the 20+% growth in earnings we had last year but positive nonetheless. In fact when you compare the relative value of stocks versus bonds, bonds are arguably the most overvalued they’ve been since stocks were during the tech bubble in 2000. Over 25% of the available bonds in the world today are now negative yielding. There are even junk bonds in Europe that are negative-yielding. That’s just unheard of! That’s like depositing money in your savings account with the promise of getting less back in return. In our opinion, there’s more risk (generally speaking) in the bond market than stocks right now. That’s not to say the swings are going away; it’s been a pretty quiet year thus far so some volatility is to be expected. And it’s a different market, the gap between high quality companies and bad investments is widening and we think that’s continues. With as quickly as things change today with technology and new innovations, companies and your investments have be just and nimble and adapt to stay competitive.
It seems like we’re talking politics on every one of our commentaries but the issues don’t seem to go away. The trade disputes are definitely having an impact; CEOs are uneasy, prices for goods have been affected not to mention the geopolitical turmoil. So far, the impact has been bigger abroad than here in the US but that could change if the problems continue. Because we’re now so globally interconnected it’s in everyone’s best interest to work towards common ground versus an all-out trade war in our view. If it’s resolved, then this latest pullback is probably a good buying opportunity.
One of the benefits of lower rates is better financing. Now could be a great time to review the debt side of your balance sheet for opportunities to refinance your business loans, mortgage or commercial properties at more attractive rates. And it’s part of our Process to help with that.
Stay tuned for more Insights including a new CG Education Series where we’ll break down topics on investing, healthcare, insurance and many others.
As always, thanks for joining and we’ll see you next time!