Yield Curve Inverts Plus Trade Tensions Persist

| September 19, 2019
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After reaching new record highs in late July, the S&P 500 Index dropped approximately 1.8% in August as trade concerns pressured investor sentiment around the world. Impacts of U.S.–China trade tensions reverberated throughout the economy and financial markets in recent weeks, including weakening global manufacturing data and plunging sovereign interest rates. As a result, safe-haven assets like gold, government bonds, and utilities outperformed in August.

Escalating trade tensions early last month dashed hopes of a quick resolution to the ongoing dispute between the US and China. Both sides are attempting to show strength as China is dealing with protests in Hong Kong and preparing for the 70th anniversary of the People’s Republic of China this October, while President Trump is gearing up for the U.S. presidential election. While global manufacturing has borne the brunt of the trade damage, the latest round of tariffs will impact consumer goods as well.

Fortunately, the U.S. consumer remains in good shape, bolstering the economy. The unemployment rate is low, wages are rising, and debt as a percentage of disposable income remains near four-decade lows. Personal spending has driven U.S. output, which during the first half of 2019 remained slightly above the average for the economic expansion. We believe the key to sustaining growth is renewed strength in business investment, which likely requires progress on trade.

The inverted U.S. Treasury yield curve reflects these uncertainties. An inversion occurs when short-term interest rates exceed longer-term rates and historically has indicated looming economic weakness. Considering the relative strength of the U.S. economy and expected interest rate cuts from the Federal Reserve (Fed), we’re not convinced that a recession is imminent.

We believe the message being sent by the yield curve is that monetary policy is too tight given trade uncertainty, so the Fed will likely respond with lower interest rates. Of course, we will have a recession someday, and now that we’re in the longest expansion ever recorded, anticipation is high.  Yet reviewing fundamentals, even with trade, we’re hard pressed to project contraction soon.

In conclusion, fundamentals of the U.S. economy remain solid even as trade uncertainty weighs on investor sentiment. We would interpret the yield curve inversion as a signal that the Fed is too tight, not of imminent recession.  We recommend suitable investors continue to focus on economic and market fundamentals while maintaining diversified portfolios.

by

Bryan Foronjy, CFP®

Founder and Principal Wealth Manager

Foronjy Financial

Bryan Foronjy is a registered representative with, and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Strategic Wealth Advisors Group LLC, a registered investment advisor.  Strategic Wealth Advisors Group LLC and Foronjy Financial are separate entities from LPL Financial.

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