Markets "In a Nutshell" for December 11, 2018Dec 11, 2018
Investment Week at a Glance
Stocks finished lower for the week. The Dow Jones Industrial Average was down 4.50%, the S&P 500 fell 4.60%, the New York Stock Exchange Composite (2,000 stocks) was down 4.14% and the average investors index (Value Line Index) was down 5.11%. Foreign stocks (DJ Global ex U.S.) were down 2.16%. Bond prices were higher for the week, pushing the yield on the 10-year U.S. Treasury down 14 basis points to finish the week at 2.85%. (Data sources: Barron’s Financial, Wall Street Journal)
Renewed volatility this year remains among the top market headlines with worries about rising interest rates and the uncertain outcomes of a trade war with China weighing on investor sentiment. The increasing uncertainties have caused “buying the dip”, one of the hallmark strategies of the bull market where investors buy stocks quickly after a sharp drop, to disappear from markets and create instability. Diversification is proving to be as useful as advertised with stocks globally finishing lower for consecutive weeks and bonds having their best performance since May.
Inversion of the Yield Curve
Last week, the 3-year and 5-year Treasury inverted, meaning that the yield on the 5-year Treasury fell below the yield of the 3-year Treasury. This is a flashing red light to most investors and has historically been one of the most accurate predictors of a recession, but there is a lot to consider. Only a small portion of the yield curve inverted, with the most commonly followed indicator being an inversion of the 2-year and 10-year Treasuries. Recessions also typically take anywhere between 6 to 18 months to occur once the 2 and 10 year Treasury yields invert and in that time stock markets tend to continue to perform well.
There is still wide consensus among economists that there will not be a recession in 2019 and U.S. economic indicators continue to show a healthy economy along with confidant consumers and businesses. The historically strong labor market continued to show this long lasting bull market still has room to go with the latest update coming on Friday showing that jobs are persistently being filled with the unemployment rate remaining at 3.7% and wages continuing to rise above the current bull market average. As always, diversification between stocks and bonds continues to be a reliable tool to be defensive in volatile market conditions like these.
Before this year, when was the last time the unemployment rate was below 4%?
Have a good week!
Answer to quiz:
d) 2000 was the last year the unemployment rate fell below 4%, reaching as low as 3.8% in April of that year. (Bureau of Labor Statistics)