It is now official: a recession in the US will be beginning next Tuesday at about 1:30 pm. The US yield curve inverted last Wednesday and the world freaked out. Every (save one) recession in the last 50 years has been preceded by an inversion of the yield curve. However, the lead time to the recession is less than exact. Equity market returns from the time of inversion to the actual recession have also been positive, up to 20% in some instances. So why is everyone worried the world is coming to an end? Fear sells; calm is just not that exciting. Things are indeed slowing globally, with Germany likely in a recession. The US too is also slowing, but some key parts of the economy remain relatively strong. With interest rates so low, refinancing activity has exploded and potentially could help retail sales later this year and into next. Retail sales remain solid. Inflation has ticked up a bit but is not in the danger zone. Jobless claims remain near generational lows indicating a still solid jobs market. As we highlighted a few weeks ago, this has been an unconventional recovery and the role of global central banks is likely to make the next recession just as unconventional.
Missed amid the handwringing about the yield curve was the relatively positive week for US economic data points. Retail sales, housing, and inflation all were better than expected. Some of the regional Fed data was also better than expected, indicating recessionary fears today are a bit misplaced. To be sure, some of the global data points are downright scary, hitting levels not seen since the bottom in 2008. The global economy, while hurting, is not in the same place as 2008, especially when comparing the headlines during the fall of 2008. Back in the US, the data has been beating expectations for the past few months. The next few weeks will be quiet on the economic front and hopefully from the equity markets as investors finish up their summer vacations ahead of the Labor Day three-day weekend in the US.
Yields are back down to historic lows and with the inversion last week, many penciled in a recession sometime ahead of the US election next fall. The larger, global concern is the total dollar amount of sovereign bonds that are yielding less than zero. Nine countries have bonds yielding less than zero for maturities out to 15 years, with four having negative yields out to 30 years. By contrast, the US sticks out like a sore thumb with “juicy” yields of 1.5% for 10 years. The negative yields “over there” may be forcing some of the funds into US Treasury bonds to garner additional yield. Foreign investors, after adjusting for currency hedging, can still net out a better return here than in their home country. Can negative rates wash ashore here? Former Fed Chief Greenspan thought it very possible. It could turn everything we think we know about investing upside down.
Since hitting a momentum peak at the end of the first quarter, stocks have treaded water, albeit in an interesting fashion! The decline we are experiencing is not much different than the one ending in June that pushed stocks back to the yearly high. The sentiment is getting bearish rather quickly as investors scoop up stocks that have a dividend and are considered “safe”, like utilities, REITs and some consumer staples. Technology has been hurt, more from the ongoing trade war than a slowdown in activity. One sector that has had its share of trouble over the past few years is energy. Since peaking in mid-’14 when prices at the pump were approaching $4/gal, the average price of an energy-related stock is back to the lows of early 2016, after prices collapsed. Even as crude prices have nearly doubled from the 2016 bottom, energy stocks can’t find love from investors. Many have dividend yields over 3%, rivaling many utilities along with decent earnings and cash flow. It is a sector that is interesting, but we’d like to see some better relative performance before jumping into the sector just yet.
While the short-term picture may have brightened some, the long-term outlook for stocks remains cloudy at best as earnings have struggled to rise over the past three years (and prices have risen) and debt becomes a larger piece of corporate balance sheets. Valuations are likely to remain a wet blanket on prices if/until a meaningful agreement is reached on trade. Trade is at the heart of the issue with stocks. Regular comments about trade, raising/postponing tariffs, close to a deal or calling off negotiations will continue to roil stocks.
The opinions expressed in the Investment Newsletter are those of the author and is based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.
Senior Vice President Paul Nolte is interviewed by Bloomberg on the volatility in the stock market.
“Everybody is flipping out,” said Paul Nolte, a portfolio manager at Kingsview Asset Management in Chicago. “We’ve had three down weeks of equities, we’ve seen the yield curve flatten out and fall, and investors are very sensitive to the news flow.”
Read the full interview here.
Senior Vice President Paul Nolte is interviewed on TD Ameritrade Futures on the recession, housing markets and the rate outlook.
Kingsview Partners is proud to announce it has officially ranked on the Inc. 5000 list of the fastest-growing privately held companies in America for the second consecutive year.
“I am incredibly proud of how we have grown our firm 764% over the past three years,” said Aaron Klemow, Kingsview’s Managing Director of M&A. “The continued growth is underpinned by our strong culture and commitment to elevating the standard of care clients receive from their financial advisors.”
Chief Operating Officer, Sean McGillivray added, “To be recognized by Inc 5000 for two consecutive years is truly an extraordinary accomplishment and places us among elite company. We are certainly proud of our team here at Kingsview Partners and we don’t plan on slowing down anytime soon. Our partners will continue to deliver measured and personalized service, embracing the firm’s no-nonsense approach to advice, investment management and financial planning.”
“It is always exciting to receive recognition for our growth,” said Josh Lewis, Senior Managing Partner of Kingsview Partners. “It is my goal to make sure that as we continue to grow, we do so in a prudent manner to ensure the long term stability of our firm.”