Q3’s 2019 Market Update
Brandon Hobson, CPA | Director of Investments
Volatility is picking up in Q3, and some of you may be anxiously waiting for it to subside. If you closely watch the markets or have tuned in to recent media coverage, you can’t escape it. The U.S. announced that they are increasing tariffs on China and a trade deal doesn’t look like it’s coming any time soon. The IMF cut global GDP forecast for 2019 (1). Possibly most concerning was the temporary inversion of the U.S. treasury yield curve on 8/15/2019, which caused widespread panic in the markets.
What exactly is an inverted yield curve and what does it signal? The yield curve inverts when interest rates on short-term treasuries are higher than interest rates on long-term treasuries. Specifically, when the 10-year falls below the 2-year yield, it may signal a recession is on the horizon. When the yield on the 10-year falls below the 2-year, it sends the message that investors are willing to pile into safer long-term investments with a lower rate of return because they are worried about the economy in the near term. The demand for the long-term safety drives down the yield on the 10-year relative to the 2 year, causing the inversion.
An inverted yield curve doesn’t guarantee a recession, but the yield curve has inverted before every recession since 1955 (2). History shows that on average past recessions start about 1.5 years after a yield curve inversion. During this time, the market has historically performed well producing a 15% return on average (3). It’s worth noting that the yield curve inversion that took place on 8/15/2019 was temporary and the curve is no longer inverted, but we are not in the clear. The curve may invert again soon.
You may be wondering; how does all this impact our investment strategy here at PracticeCFO? To provide some insight, we hold investment committee meetings monthly to discuss our investment strategy and determine whether we need to make changes to our investment models. At the end of Q4 last year we had the foresight to adjust our models by increasing the weighting of defensive sectors that have historically performed better heading into a recession. Specifically, we tilted our allocation to sectors like utilities, consumer staples, and healthcare. We are well positioned given where we are in the economic cycle.
Have questions about our investment strategy? Contact our Director of Investments, Brandon Hobson, CPA, at firstname.lastname@example.org or by calling (858) 634-9001.