Looking Back at August
August was a volatile month with the stock market dropping almost 3% on August 14, 2019 when the yield curve inverted for the first time since 2007. The yield curve inversion means that the interest rate on the US two-year bond is higher than the interest rate on the 10-year bond. This inversion indicates that investors are not as confident about the long-term economic future as they were.
Trade tensions with China have tightened. It seems that both the US and China are not going to alter their current course.
Looking Ahead to September
There are several things that we need to keep in mind when we look at the future of the US economy.
First, the yield curve inversion could indicate a future recession. If that happens it would most likely be 20 to 24 months before it takes place.
Second, recessions are not alike. We do expect that when we have a downturn, it will be nothing like that of 2008. Slower economic growth does not indicate a recession.
Third, most analysts believe that when the Fed meets this month on Wednesday, September 18, they will lower short term interest rates. This action could eliminate the yield curve inversion and the speculation of recession.
It is important to keep in mind that most recessions are caused by fear, not necessarily factual economic data.
As far as trade, the dispute with China has shown few signs of improvement. Global economies are continuing to weaken. This uncertainty is causing large firms to hold off on capital spending, which can hurt our economy.
Consumer confidence is very strong and consumer spending accounts for about two-thirds of our economic growth.
Our View
Over the last few months, we have been emphasizing the need for long-term diversified portfolios. Liz Ann Sonders, Sr. Vice President, Chief Investment Strategist for Schwab addresses it this way:
So what?
While manufacturing continues to weaken and the U.S.-China trade dispute shows no sign of a resolution, the U.S. consumer continues to power the economy thanks to positive wage growth and a tight labor market. However, it’s prudent to be prepared for more bouts of volatility, and investors should make sure they are keeping a diversified portfolio with equity exposure equal to their risk tolerance. Within U.S. stocks, we continue to favor large cap stocks over small caps…We don’t recommend trying to trade around short-term moves, but rather focusing on the long-term, remaining disciplined, and using bouts of volatility as opportunities to rebalance.
(Schwab Market Perspective: Storm Clouds Building, Liz Ann Sonders, Senior Vice President, Chief Investment Strategist, Schwab Center for Financial Research, August 30, 2019)
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