Welcome to the Monthly Economic Update, today is February 1, 2019. Something interesting happened yesterday. I don’t know if you have ever experienced it or not, but perhaps you have seen a child that doesn’t get his or her way and they throw a temper tantrum. Ultimately the parent gives in and the child is all of the sudden happy. That’s what happened yesterday to the stock market when the Fed reacted to market tantrums.
The Fed Reacted to Market Tantrums
Federal Reserve Chair, Jerome Powell, and the Fed reacted to the stock market tantrums that have been going on over the course of the last year saying he doesn’t know if the Fed is going to need to raise rates anymore or not. There were some small things in what Powell said that should bother each and every one of us. Those things lead me to believe that we still might see some further rate hikes this year. Telling me, again, the Fed reacted on emotion to the market tantrums.
There was a tone in his speech that led me to believe that Powell is thinking that maybe the Fed will have to raise rates a couple more times because they’ll need some ammunition when this economy turns negative. Those were not his exact words. You can go read or watch what he has said, but I’m here to tell you that just because he said we’re going to pause on interest rate hikes doesn’t mean that everything that happened in the markets over the last year is all of the sudden rosy. That’s just not the case.
Indices Performance for January 2019
Looking at Figure 1, which includes your major indices for the month of January, you might think, “Wow! We’re off to the races!” Make no mistake, January 2019 was an unbelievable month in the market.
Indices Performance Over the Last Three Months
Figure 2 – Chaikin Analytics – https://www.chaikinanalytics.com/
If we look at the same indices over the last 3 months, in Figure 2, we get a little bit of a different story. You can see the peaks and the valleys. The decline that we saw from the high in September 2018 to the low on December 24, 2018, might make you think the volatility is over, right?
Indices Performance Over the Last Six Months
Now Figure 3 is looking at the same indices over the last 6 months, and we see more volatility. If we were to look at this same chart on a 12-month basis, we would see even more volatility. This volatility is one of the reasons why the Fed reacted to market tantrums.
When we run into the end of an economic cycle we are done with the expansion and we begin contraction, and I’m not saying we’re there yet, but we are very long in the tooth in this economic cycle. What I am saying is that it could mean the next recession is not too far away. That’s been talked about quite a bit in a lot of the major news outlets. Some people are staying away from that word, but I don’t think it’s a bad word. The economy will naturally have expansions and contractions and at some point, we will start to see the contraction. I already believe we are going into a corporate earnings recession this year and that could be the precursor to a true recession. But don’t let those things bother you, there are other things we need to be focused on.
Historical S&P 500 Performance
The S&P 500 During 2001
I want to take this to a time that is totally unrelated to today. In Figure 4 we’re looking at the S&P 500 in the year 2001. Look at what happened in the early part of 2001, we had a decline of about 19% in around 2 months between February 2001 and March 2001. Then between April 2001 and May 2001, the market erased almost all of those losses. Sound familiar? That’s a lot like what we’ve seen here over the last 3 months.
So, looking back at Figure 4 what happened after May 2001? We got a large decline into September 2001 post 9/11. After that the market began to recoup again, but what happens if we take this chart out through the end of 2002?
The S&P 500 During 2001 & 2002
Figure 5 – Kwanti – https://www.kwanti.com/
That’s what we’ve done in Figure 5, we’re seeing the S&P 500 performance over 2001 and 2002. Look at what happened! There were two major market rallies in the year 2001, both of which were nearly 20%, and yet the market ended up highly negative that year. The same thing happened in 2002.
Bear markets never act rationally. Again, I’m not saying we’re in a bear market right now, what I’m saying is I think it’s very likely we’re at the end of a cycle of expansion and we are beginning that next cycle of contraction. Nobody knows exactly how that will turn out.
So, what do we have to do? We’ve got to have some caution. We are positioned in most of our portfolios in a cautionary mode. I encourage you to keep the line of communication open with your advisors and our staff to understand how we’ve got your portfolio constructed right now and how it might react in the event of a recession or a bear market. Focus back on your plan making sure your spending expectations are still in line and that we still understand what it is you want to do. We are here to listen and talk to you about what’s going on with your portfolio. So, give us a call at 913-393-1000, email your advisor, or, if you aren’t a client, fill out the form below if have questions!
Interest Rates & the Yield Curve
Figure 6 – GuruFocus – https://www.gurufocus.com/yield_curve.php
Turning our attention to interest rates, we went over this briefly in our January video as well. On the left of Figure 6 is the yield curve. This is what’s interesting, we see a 1 Year Treasury yield at 2.6%, 2 Year Treasury yield at 2.56%, 3 Year Treasury yield at 2.54%, 5 Year Treasury yield at 2.52%, 7 Year Treasury yield at 2.61%, and the 10 Year Treasury yield at 2.72%. Did you catch that? 2.6% on the 3 Year, 2.61% on the 7 Year, and 2.72% on the 10 Year. We are 0.12% away from the 1 Year exceeding the yield on the 10 Year Treasury which makes the yield curve nearly inverted.
The right side of Figure 6 shows us that an inverted yield curve has led to the past seven recessions and we are pretty darn close, and we have been flirting with that line for the last several months. I do want to point out that when the yield curve inverts it doesn’t immediately lead to a recession, but the last seven recessions happened within just a few months after that yield curve inverted.
Talk to Your Financial Advisor
Remember, recessions are not something to be feared they are something to be expected. The real key is understanding how your portfolio, and more importantly your spending and financial goals, is affected by the probability of inflation. We plan for this. I’ve been through 3 major bear markets in my career in the last 31 years. It’s not something new to us, it’s never fun or pleasant, but we’ve been here before and we’re here for you today.
I encourage you to keep the dialogue open with my office and advisors and talk to us about what’s going on. Talk to us about your emotions because I know that there are times where emotions can really run high when it seems like you can’t do anything right in these markets. We’d be happy to explain further how the Fed reacted to market tantrums and help you make decisions outside of emotion.
Keep the communication open, we are here for you. If you aren’t a client of Barber Financial Group, but want to learn more about how you can prepare your retirement plan, give us a call at 913-393-1000 or schedule a complimentary consultation below.
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The views expressed represent the opinion of Barber Financial Group an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Barber Financial Group does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.