Friday 3/22/19 saw the largest single day decline in the S&P 500 since January 3, 2019. The catalysts were weaker than expected manufacturing index reports for the US and Europe, and the inversion of the yield curve.
The yield curve inverts when shorter-term interest rates are higher than longer-term interest rates. Historically, an inverted yield curve is a fairly reliable predictor of an upcoming recession. However, while every recession since 1962 has been preceded by an inverted yield curve, not every inversion of the yield curve has led to a recession.
Some analysts like to use the 2-year Treasury versus the 10-year Treasury. My research tells me the more reliable indicator comes from comparing the 3-month Treasury bill to the 10 year Treasury bond. Recessions have historically started within 18-24 months of an inversion of the 3-month/10-year rates. On Friday, the 3-month/10-year rates inverted briefly. It finished the day with the 10-year rate higher by only 0.02%, the smallest spread between these rates since September 2007.
These factors combined to heighten concerns of a slowing global economy. Two other big unknowns hanging over the markets right now are the US/China trade deal and the United Kingdom leaving the European Union. A negative outcome for either or both will likely put further pressure on global growth. A positive outcome for either or both will likely relieve some of the concern.
The next couple of weeks should provide some clarity as the UK has a vote on Brexit this coming week and the Trump administration is pushing to conclude their trade negotiations with China. I expect volatility to be elevated as the market awaits the outcome of these issues.
As always, we continue to monitor the situation closely and will respond accordingly.