August Volatility – Crosscurrents in the Data
Daniel Yu | August 16, 2019
August 2019 has certainly been a volatile month, with the market falling about 3% in one day on August 14. Two items have dominated the headlines – trade and the inverted yield curve.
Trade and the U.S. Economy
In terms of trade, exports account for only about 8% of GDP. Our economy is far less trade dependent than other nations. Therefore, even if there is a slowdown or recession in other nations, the impact on our national economy is minimized. Also, retail sales (a measure of the strength of the consumer) continue to be strong.
The Inverted Yield Curve
The inverted yield curve means that shorter-term borrowers are being paid a higher yield than borrowers of longer terms.
The picture below (Source: Schwab Institutional, 08/16/2019) shows that not only have rates fallen from one year ago, it also illustrates that a person purchasing a short-term (two-year) Treasury is receiving the same yield as a person who is loaning their money to the U.S. Treasury for 10 years.
More importantly, the inverted yield curve has a high historical correlation with recessions. When the two-year U.S. Treasury yield became essentially equal to the 10-year U.S. Treasury yield, some headlines blared the R-word. However, is it as simple as all that? Consider that prior to a recession, U.S. corporate profit margins tend to decline, and the corporate default rate tends to rise. Neither of these issues are presently happening. Also, the spread between U.S. Treasury bonds and U.S. High Yield debt is quite low, which would be odd for a recession. In other words, if a recession is coming, bond holders (the people loaning money to companies) do not expect the default rate to increase significantly.
Overall, we do not see a recession as imminent. However, if recent volatility has become a source of worry or concern, a call with your relationship manager could be useful. To schedule an appointment, please call REDW Wealth at 505.998.3200 in Albuquerque, or 602.730.3600 in Phoenix.