Sir John Templeton, the founder of Templeton Investments, said that the four most expensive words in investing are “This time it’s different.”
The most predictive part of the Treasury yield curve, the 10-year to 2-year spread, inverted on a closing basis on 8/22/19 and remains inverted currently. This indicates that the US economic expansion may have between 1-2 years before falling into recession. While the stock market can rally on the hope of a trade deal with China, fundamentals can develop later that cause earnings and the economy to disappoint. That’s what the inversion is telling us. But the curve has inverted five times since the late 1970s—and each time a recession started an average of 20 months later. The chart below shows how predictive a yield curve inversion is. Make no mistake, a recession will eventually come. I don’t believe “this time it’s different”.
10Y/2Y Spread Inverted Before Each of the Last Five Recessions
Source: as Blackstone as of 8/26/19
August was one of the most volatile months in a decade. On an average day over the past month the S&P 500 has moved +/-1%, one of its widest ranges since the financial crisis. There were 11 out of 22 trading days with price moves of greater than 1% plus or minus during the month. Despite many large daily and intraday swings, the S&P remains stuck within a narrow range between 2,945 and 2,822.
The wide swings in stocks are due in no small part to a historic level of uncertainty regarding the U.S. administration’s economic policies. An index of that uncertainty has spiked to a level that matches other major financial or geopolitical events.
These uncertainties have led to sharp indecision by investors – buying on any good news and selling on any bad news. In my experience, periods of sharp indecision are generally resolved sharply. Given that we are heading into the statistically worst month for stock market returns, I am preparing as if this indecision is resolved to the downside. Also, while consumer spending has remained strong, consumer confidence took a steep decline in August, falling by the most since December 2013. One out of every three consumers surveyed mentioned tariffs and trade war as their biggest concern.
Source: Yardeni Research Source: FactSet, MarketWatch
I expect September to be the same roller coaster ride we saw in August. At the moment, I believe the upside potential is less than the downside risk. As such, we remain neutrally positioned with a cautious bias. I would rather miss out on a small upside move to avoid getting caught in a swift downside adjustment. Feel free to call us with any questions.
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September Calendar of Events (comments and additions for future months are always welcome)
- Summer is over and kids are going back to school – please be careful on the roads.
Sep 2nd Labor Day
Sept 11th Patriot Day- honoring those who lost their lives on 9/11/01
Sept 12th Eloise and my 11th anniversary
Sept 23rd Autumn begins
Sept 29th Rosh Hashana begins – wishing all our family, friends, and colleagues of the Jewish faith a very Happy New Year
Sept 29th National Coffee Day – Where would we be without coffee?
Sources: Yardeni Research, SentimenTrader. Blackstone, FactSet, MarketWatch
Although information herein has been obtained from sources deemed reliable, its accuracy and completeness are not asserted. All opinions and estimates included in this report constitute the judgment of the financial advisor as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.
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