Three weeks left in the year and we are still awaiting a 4th-quarter rally. With the S&P 500 again negative year-to-date stocks acting pretty volatile, time is running out.
Some stats that might interest you:
If the year ended today, it would be the first time since 1990 that both stocks and bonds finished negative for the year (stocks as measured by the S&P 500 and bonds as measured by the 10-year Treasury bond). In 1990, the S&P lost -3.1% and the 10-year Treasury yield climbed climbed from 7.9% to 8.1%.
A down year for stocks would be the first since 2008, when the S&P 500 fell -37%.
Apple stock, which at one point was up nearly +40% on the year, is now only up +1% in 2018.
The biggest gainer in the S&P 500 this year? The clothing & accessory company Fossil, which is up roughly +115%.
The biggest loser in the S&P year-to-date? Auto part manufacturer Delphi Technologies, which is down roughly -70%.
Bitcoin, which many people had been asking me about this time one year ago, is down -76% in value in 2018 per the NYSE Bitcoin Index (NYXBT).
For what it is worth, the S&P went on to gain +30% that next year in 1991.
The yield curve is extremely close to inverting. More on this below.
General Electric is down -78% from its peak back in 2016.
65% of stock prices among the S&P 500 are below their 200-day moving averages.
In The Market...
The S&P 500 fell -4.4% last week. Let's look under the hood:
Stocks fell back to the lows from two weeks ago. The overall market continues to look weak. Nothing new there. The bond market was more eventful, as the yield curve gets closer to inverting.
A yield curve “inversion” is when shorter-term interest rates exceed longer-term rates. Specifically, we are looking at the 2-year Treasury bond yield potentially eclipsing the 10-year Treasury yield. Here is where they respectively enter the week:
10-year yield: 2.85%
2-year yield: 2.72%
So we are close. Inversion is totally ass-backward, in that it would mean you could earn a higher interest return lending your money for 2 years than you can lending your money for 10 years. That makes no sense and is not what anyone wants to see. Even if the yield curve does not invert, the fact that the spread between short-term and long-term rates is so slim is problematic enough.
So how does it happen that short-term rates could surpass long-term rates? I believe there are two reasons. First, the Federal Reserve has raised short-term rates aggressively, increasing the Federal Funds rate seven times in just the last two years. Second, long-term rates have sank lower due to renewed demand for long-term Treasury bonds over the past month (remember, higher bond demand means rising bond values, which means falling bond rates).
In an ideal world. the Fed would raise short-term rates as the stock market rises. Meanwhile, the demand for long-term Treasury bonds would weaken because investors prefer being in stocks over bonds. Weaker demand for long-term bonds means long-term rates go up as well.
But lately this has not been the case. Short-term rates have risen, but stock prices have fallen. Meanwhile, investors are migrating back into long-term bonds, which has pushed long-term rates lower. In my opinion, this is the worst trifecta of all: Rising short-term rates, falling long-term rates and stock market stagnation.
I’m not quite at the point of talking “recession”, but there are some signs out there that have me concerned. I’ll lay those out if it becomes appropriate to do so. An inverted yield curve is not required for a recession to occur. However, just know that there has never been a recession without one. It usually takes at least a year though for a recession to occur from the time when the yield curve first inverts, so there’s that.
We sold our Utilities fund position (FXU) last week for a modest gain, which consequently increased our cash position. We will continue to seek out new opportunities, however right now the market is so choppy that it is unlikely we will just yet.
In Our Portfolios...
What's New With Us?
It was a pretty rainy weekend, but despite that we went down to Green Lake on Saturday evening. The entire pathway around the lake was lit up, including a pair of giant hot air balloons that was pretty cool to see. It was a fun holiday outing.
Have a great week!
Brian E Betz, CFP®