March 29, 2019
Making Cents of the Markets
Be in the Know
Anyone else tired of hearing about the yield curve yet? That was this week’s topic du jour again. However, there is overwhelming evidence that after an inversion, there tends to be a long lead time until a recession actually hits. Included in our chart of the week is an analysis on yield curve inversions since 1966, and what the S&P 500 did after. Of course, we do not want to give the impression that the yield curve inverting is not important, because it is. It just has to be used in conjunction with a lot of other pieces of economic data. We pay close attention to all the data, as well as the politics at play. It will be important to see how the data plays out over the next quarter.
We have done a lot of investigating, and the returns for equities after the yield curve inverts is not scary at all in the short or medium term. In the month after an inversion, the S&P 500 has averaged a gain of 1.74%, with positive returns five out of six times. In the following six months, the index has averaged a gain of 6.75%, but only half of those returns were positive. And in the year after the prior four inversions, the S&P 500 was positive every single time with gains of at least 9%.
For the week, the S&P 500 ended up 1.2% and the TSX was flat. On the economic front, we had a couple of stronger than expected beats on Friday contrasting the negative sentiment from the yield curve. New home sales in the US came in at 4.9% growth versus 2.1% expected, and consumer sentiment indicators came in at 98.3 vs 97.8 expected. We think the first quarter economic readings will be a little softer overall, as the economy dealt with harsher weather, a government shutdown, the yield curve inverting, and political uncertainties, but the reports on Friday provided a boost. The second quarter should also serve up some strength, especially in the US.
Historically, April is a strong month of the year for stock markets. We are comfortable with our Legacy equity allocations as they balance our external manager allocations as well. We are also waiting for more confirmation of continued growth in North America, or a firm resolution of trade talks between the US and China. Also, earnings season is just around the corner which we are cautiously optimistic about – although expectations have been lowered. Of note for next week, we will be getting major jobs reports out of the US and Canada for March which we will closely monitor. We expect the labour markets to remain strong for both, with unemployment staying at 3.8% in the US, and 5.8% in Canada (both considered full employment levels).
We know that stock markets can change quickly, with the most recent example being in the last few months. Investors recently dealt with the worst December since 1931, followed by the best January since 1987, and the best quarter since 2009. That is why we have always championed active management, as you need to be agile in this type of market to protect and grow your wealth. Protecting against market fallout is of utmost importance to us and our clients. There will be a time in the future where we get another recession and bear market – it is our belief that time is not now but we will be ready for it when it comes. The data is telling us that the time for that is not imminent, and the next year looks stable for now. What we do know, is that there will be ups and downs to take advantage of and we will be looking for the opportunities as they present themselves along with protecting your portfolio should the tide change.
Chart of the Week
The S&P 500 average and median performance after yield curve inversions since 1966, 1, 3, 6, and 12 months after:
Beyond the Markets
It’s that time of year again! The Vancouver Cherry Blossom Festival begins in April, however, the awe of the flowering trees has already begun to take hold of Vancouver residents. Witness the flowering of 43,000 cherry trees across the city of Vancouver, many of which originated as gifts from Japan. The festival offers guided walking and biking tours through neighborhoods filled with the trees in addition to events aimed at bringing the community together to appreciate the beauty of the blossoms.
Click here for the list of the Festival’s featured events.
Listen to this week’s Making Cents of the Markets on CKNW. We discussed the yield curve inversion in the US and Canada, what to invest in during this time, and creating a tax efficient investment portfolio. Listen here.