In last week’s Market Report, we discussed how volatility had ebbed in the market since Jerome Powell’s dovish speech on interest rate cuts on the way. The market did not wait even a day to return to volatility and did so in dramatic fashion as the VIX spiked 38% in one day after payroll data weakness. The market finished the worst week of the year last Friday, almost as if going through a to-do list and checking the box, acknowledging that September is supposed to be a volatile, historically bad month.
We have additional data points coming out this week including the University of Michigan consumer sentiment number, July consumer credit numbers, initial jobless claims as well as August PPI (Producer Price Index) and CPI (Consumer Price Index) numbers. It’s likely that the PPI and CPI numbers carry less weight than they did now that the Federal Reserve has finally tipped its hand on the cuts that are coming later this year. But we do have a sense that the negative data is compounding as data point after data point are coming in negative. While the market was preoccupied and tuned out all else but what could bring interest rates down, bad news was actually good news to the market, and many times we saw bad inflation data actually drive the market higher in the hopes of lower interest rates. To some degree, we’ve returned to sanity it seems, and bad news is bad news once again, so look for any data weakness to do the more predictable thing – drive markets lower.
The biggest news from this past week was the un-inversion of the yield curve which happened late in the week1. A more normal yield curve means that longer dated bonds, such as 10-year treasuries, pay more interest than shorter-dated bonds, such as 2-year treasuries. This makes sense as when you are loaning money for a longer period of time, you would expect more interest. The inversion of the yield curve over the last 2 years, where shorter-date bonds pay more, usually signals a recession in the offing sometime in the year or two to come. The unwinding of that inversion (think of it as a return to normalcy) has its consequences. Five recessions out of six in the last 44 years were preceded by a yield-curve inversion. It’s been two years plus on this yield curve inversion and we still haven’t had possibly the most anticipated recession ever. That puts the negative data over the last few weeks into a certain context. The yield curve un-inverted before the recessions of 1990, 2001, 2007 and 2020 began, so if you think of the economy in those terms, our real recession watch should begin now. We should always respect history and take our cues from it where it informs us like this.
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To address the movements in the bond market because of the changing interest rates, last week the WTA Investment Committee changed our ETF strategy in our tactical Extended Fixed Income portfolio to go longer out on the yield curve. Previously we had been invested in a short-term T-Bill ETF in our model. We had spotted the beginning of a trend of buying in longer duration bonds and acted upon it for our clients. We’ll continue to watch for more signs like this especially in our tactically traded models. We also made a change in our Christian Values ETF model to allocate more to a higher performing ETF.
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On the other side of all of this down trending data, is the need for most all of our clients to stay somewhat invested. Be mindful of inflation and how damaging it can be the long term. Realize that the stock market is one of the very few ways you can effectively combat inflation over a few decades. $60,000 of annual expenses turns into $80,634.98 of expenses in 10 years with just 3% inflation2, so the need to diversify and keep a foot in the market is ever necessary. If you have questions, concerns or just need a sounding board for your financial thoughts, please call us at 864-297-6125, so we can keep you on the path to financial freedom.
Sincerely,
The WTA Investment Committee
1Source: The Wall Street Journal: https://www.wsj.com/livecoverage/stock-market-today-dow-sp500-nasdaq-live-09-05-2024/card/say-goodbye-to-the-inverted-yield-curve–snsL80qp8JX9UvaMCvVc.
