Tough day for stocks. After their best week of the year last week, followed by healthy gains on Monday, major indexes did an about-face and fell more than 3% yesterday. Several catalysts drove traders to the sidelines (and into Treasuries): Inversion at the short end of the yield curve heightened recession fears and weighed on financials. In addition, the latest headlines from Washington, D.C. suggested President Trump’s successful characterization of what was agreed to with China may have been overstated. Additional details have been scarce and those that were available have conflicted, leading to doubts about whether 90 days is enough time to solidify meaningful terms. Profit taking likely also played a role after such strong gains last week.
Keep in mind that volatility is normal. Though never pleasant, volatility is a sign of healthy, functioning markets. It’s hard to ignore the short-term swings, and we don’t want to be dismissive of the risks, but when focusing on market fundamentals, we continue to like stocks here and think our S&P 500 Index year-end fair value range of 2900-3000 is still reasonable. We encourage investors to remain focused on long-term goals.
Yield curve fears escalate. With the short end of the Treasury yield curve inverting this week (2-5 year and 3-5 year) for the first time since 2007, many investors are wondering whether a recession could be forthcoming. However, it’s important to note that neither of these measures of yield curve steepness have been reliable precursors to recessions. We think this move may be better interpreted as a market signal to the Federal Reserve (Fed) that it needs to temper the pace of its rate hikes in 2019. As a recession indicator, the most reliable yield curve spreads have been those with larger maturity gaps, such as 2-10 year. Also, consider the yield spread between three month Treasury bills and 10-year notes remains above 50 basis points, implying the Fed may have room for at least two more hikes without potentially inverting the more predictive curve measures.
Today on the LPL Research blog, we’ll take a closer look at the yield curve and show why history says there still could be ample time for this economy to continue to grow.
- ADP Employment Report (Nov)
- Markit US Services PMI (Nov)
- ISM Non-Manufacturing Index (Nov)
- Fed Beige Book
- Trade Balance (Oct)
- Initial Jobless Claims (Dec. 1)
- Durable Goods Orders (Oct)
- China Foreign Reserves (Nov)
- University of Michigan Sentiment Index (Preliminary, Dec)
- Jobs Report (Nov)
- Japan Leading Index (Oct)
- Germany Industrial Production (Oct)
- Eurozone GDP (Q3)
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Index data obtained via FactSet
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