—Dave Wickersham, CEO
We just wanted to reach out and give you our feelings about the market volatility. With the news coverage, trade issues, Hong Kong, Fed signals and yield curve inversion; there are a lot of reasons that the markets are more volatile than we have seen. I expect to see a continuation of the volatility and concerns until we get a clearer view of what the longer term will bring.
The yield curve inverted yesterday because the interest rate on 10-year treasury bonds dropped below the interest rate on 2-year treasuries. There are some obvious causes that we can see:
- There is a significant flight to safety with a high level of cash looking for a place to go and the 10-year US treasury bond is the current choice of most foreign investors and that demand is driving the price higher and yield lower.
- Federal Reserve chairman Powell has hinted at additional significant lowering of the overnight Fed funds rate (He mentioned zero which gives them a lot of flexibility but sends a potential red flag to the bond market).
- Most of the rest of the world’s economies have been declining for the last 2 years.
- Brexit looks like it will happen without a plan.
All of these drive 10-year treasury yields lower and also open the door for a slowdown in the US. Right now, the economy continues to be strong with continued low unemployment, earnings growth and continued positive expectations from corporate America both large and small businesses.
It is important to recognize that if history is an accurate guide, then the US economy could tilt into recession in 18 months. If history is a guide, it also means after the knee jerk selling the market rebounds on average 15% before recession. This has always been a good indicator in the past and while many pundits are saying “this time is different”, I am skeptical of the uninterrupted growth cycle we have been in since 2009. However, I don’t see anything in our economy that could lead to a 2008-09 type of market crash. This should be the perfect storm for a “soft landing”. This means that a correction of 15-20% is my expectation. However, I know that every time the current news hits, we will see noticeable swings in stock prices just like we have seen in the last few weeks because the computer traders will drive every up on down swing.
What should you be doing now? The one thing we know from history is that for anyone with a 3 year or longer time horizon, being out of the market has been riskier than being in. It is key to let our clients know that the market isn’t going to collapse and depending on the products they own and their tax bracket, dollar cost averaging is a way to profit from the volatility. Variable annuities and VUL allow for this from fixed accounts and if we see the selloff I expect come in September and October, this is a good time to put some money on the sidelines to move back in over the next 2 quarters. We want to make sure and not allow our clients to have knee jerk reactions to near term market swings. Every sell off that has ever occurred in US equities has led to a higher high on all of the indexes.
Again, the current volatility is here to stay and while I expect a sell off before year end, now is the time for clients to be looking for that opportunity to get into or back into equities. Thanks for taking the time to read this and don’t hesitate to reach out to us if you have any questions, concerns or feedback.