Investments

What’s Causing the Negativity?

By Dean Barber

December 17, 2018

Welcome to the Monthly Economic Update, it’s December 5, 2018 as of writing this article and the markets are closed today. December 4th was an extremely poor day in the market. I want to talk today about all of the volatility that’s going on, what we think about it, and what it means to your plans to retire or your overall retirement plan.

Volatility

Let’s start with the fact that we haven’t seen the type of volatility that we’re seeing today in 11 years. It’s been since the 4th quarter of 2007 when the sub-prime crisis began to rear its ugly head and just before the Great Recession. Now, that’s not to say we’re anticipating this volatility is going to lead to another economic downturn like in 2008. However, it is a possibility and if it does occur, we have multiple strategies in place to help protect against that.

One thing that we cannot protect against is normal volatility. Normal volatility comes along here and there and it’s almost impossible to manage through without trying to time the market. Yes, you may have seen us making a lot of trades especially on our more dynamic risk managed models, but that’s not an attempt to try and time the market. That’s an attempt to try and get out of the way in the event that what we’re seeing does become more severe

Yes, you’ve seen volatility in your portfolios and you know what the good news is If you’re a client of Barber Financial Group? We’ve already stress tested your plan for that volatility because we know that investing doesn’t exist without some degree of volatility. The idea is to help protect you from major losses in your portfolio. A 2%, 3%, or 4% loss is not a major loss, that’s something that is easily recoverable.

The Markets

Figure 1 – Chaikin Analytics – https://www.chaikinanalytics.com/

Let’s look at the markets so far this year. Looking at Figure 1, you can see that the only index in any significant positive territory on the year is the NASDAQ 100. You can also see that the NASDAQ 100 has also been a lot more volatile than the rest of the market. However, the majority of what we have going on domestically is either flat or negative territory. If we were to look at thing internationally, pretty much across the board we have negative returns.

Figure 2 – Chaikin Analytics – https://www.chaikinanalytics.com/

I want to turn our attention to fixed income for a moment. In Figure 2 we’re looking at the total U.S. bond market. Look at all of the negatives. Bonds are safe money, right? Where should we hide today? It’s the same thing whether you look at these over the last six months or year-to-date, negative, negative, negative.

Bonds have lost money this year. Most equities have lost money this year. It’s been a difficult year for a balanced portfolio. We’re going to have negative returns from time to time. The real question is, what is causing our bond funds to be negative for the year? What is causing our stock markets to be so volatile and negative for the year?

It’s two things and we’ve talked about this over the last couple months.

  1. Trade Negotiations with China – Corporate America and Wall Street has no clue what the trade deal is going to be once it’s all done. So, there’s uncertainty and the markets hate uncertainty. They don’t know if there is going to be 25% tariffs in 90 days or if there is going to be any tariffs at all. There is no way to know the impact of potential tariffs on GDP and corporate profits. What that does is makes Wall Street nervous. The couple that with…
  2. Federal Reserve Chairman Powell saying the Fed will raise rates in December and four times next year.

The markets going, “Hold on a second, time out!” We don’t even know the impact of the tariffs on China and yet the Fed is saying they plan to raise rates four times next year? That’s what’s causing the volatility. Combine those two things together and it’s a perfect mix for volatility in the market. It’s not a perfect mix for a Great Depression or huge recession, but for volatility and that’s what’s we’re experiencing today.

Don’t let these short-term trades or short-term moves in the market keep you up at night. They shouldn’t do that. We have confidence in our abilities to manage through this. It’s not going to be a smooth ride obviously, but we do have confidence in our abilities to manage through it.

Interest Rates

Back to interest rates because something happened on Tuesday, December 4, 2018, earlier this week, that has not occurred for 12 years. We saw an inversion of the yield curve. The Five-Year Treasury had a lower yield on the 4th than the Two-Year Treasury. That is abnormal. What we’re looking for, if we want to look for signs of a recession, is the 10 Year Treasury yield drops below the yield of the 3-Month Treasury. We’ve got a long way to go for that to happen. We have seen a significant flattening of the yield curve.

Figure 3 – GuruFocus – https://www.gurufocus.com/yield_curve.php

Looking at Figure 3, the light gray line represents December 2016, the darker gray December 2017, and the blue line is December 2018. In 2016, you can see the Three-Month Treasury at 0.51% and the 20 Year Treasury at 2.79%. Looking at 2017, in a year the 20 Year Treasury had dropped to 2.40% and the Three-Month Treasury had increased to 1.39%. Today, we’re seeing the Three-Month Treasury at 2.38%, the 20 Year Treasury at 3.15%, and the 10 Year Treasury at 2.98%. But what’s interesting is taking a look at the Five-Year (2.83%), Three-Year (2.84%), and Two-Year Treasury (2.83%), that is scary. That’s where the markets got spooked on Tuesday, because there was a period of time where that Two-Year Treasury was over the Five-Year Treasury yield.

Flattening of the yield curve, cool it’s fine, but long-term rates should not be lower than short-term rates. When long-term rates go lower than short-term rates it’s an indication that the bond market doesn’t believe that the economic growth we have today is sustainable. Really what we’re looking for is the 10 Year Treasury (2.98%) to be a lower yield than the Three-Month Treasury (2.38%) so we do have a good ways to go on that and we’re keeping our eye on it every single day.

I want to get back to you though because here’s what’s most important. If you’re working with us and allowing us to do comprehensive financial planning for you, we’ve stress tested your financial plan for these types of scenarios. We’ve stress tested your financial plan for the inevitability of market volatility and potential bear markets in the future. If we have a high degree of confidence that we can go through that, I want you to focus on those numbers more than I want you to focus on what happens to the value of your portfolio on a day to day basis.

We’re in control of the long-term destiny of your financial success and our number one goal is to allow you to live your one best financial life. If you want to look at anything, sit down with your advisor, keep the dialogue open and talk to us about how this market volatility has affected your probability of being able to do everything you want to do in retirement. Chances are if it was done right the first time, there’s very little change if any in your overall financial plan.

If you’re not a client and would like open up a conversation with a Barber Financial Group Advisor, fill out the form below or give us a call at 913-393-1000. Our advisors are happy to sit down and discuss your needs and address any questions you might have.

With that, I want to wish you all a very merry Christmas, Happy New Year, and I’ll talk to you again in January. Here’s to hoping that we see a little bit of reprieve from the volatility and we can get some kind of Santa rally out of this market between now and the end of the year.

Dean Barber
Founder & CEO

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Investment advisory services offered through Barber Financial Group, Inc., an SEC Registered Investment Adviser.

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.