We learned in Finance 101 that beta is a metric designed to gauge sensitivity. A stock with a beta of 1.50 relative to the S&P 500 Index should, on average, gain or lose $1.50 for every $1 gained or lost by the index.
September lived up to its reputation of being one of the most eventful months of the year, from both a monetary policy and geopolitical headlines perspective. Political discord, trade rhetoric, and the Federal Reserve’s (the Fed) policy comments on future rate cuts contributed to an interesting environment during the month.
Investors traditionally have had an appetite for yield. Sitting back and collecting a quarterly payment from doing nothing more than making an initial investment is attractive, especially to retirees or those depending on a consistent stream of cash flow.
Stop for a moment and imagine the year is 2100, the world has been fossil-fuel free for two decades, flying cars are at the cusp of attaining commercial viability, and Wall-E 1.0 has just been released. And now remember your government still has 19 years left on the ultralong, 100-year bond it issued in 2019.
On the morning of September 14, 1814, Francis Scott Key penned the first verse of The Star Spangled Banner on the back of a letter as he watched with pride as a group of US soldiers raised the American flag over Fort McHenry a day after more than 24 hours of continuous bombardment by the British. For the history buffs among us, the battle was a critical victory in the War of 1812 that began, somewhat ironically, given the current state of affairs with China, over a trade war with Britain.
The domestic equity markets were roiled in August by the trade war between the US and China. The announcement of another round of higher tariffs on Chinese goods at the beginning of the month was quickly followed by an increase in the tariffs on US goods entering China. The Trump Administration responded with even higher tariffs on virtually all Chinese goods.
The latest economic news may be causing an unsettling tinge of trepidation for investors, which is certainly understandable. The most ominous sign is the Treasury yield curve inversion. The figure below illustrates that prior to the most current yield curve inversion1, it has inverted eight times since January 1962, and seven of those inversions were followed shortly by a recession.
The Treasury’s yield curve inversion headlines, and the bad omen it signals about the state of the economy, dominated the news cycle last week. On Wednesday, Thursday, and Friday, the yield on the benchmark 10-year U.S. Treasury Note dropped below the 2-year yield.
Volatility creeps in. US equities were mostly volatile this week as evidenced by the 800-point drop in the Dow Jones Industrial Average, its biggest decline this year. But it gradually picked up later in the week, adding close to 100 points after the retail sales data was released Thursday, and posted a strong opening on Friday.
A year ago, the Federal Reserve (the Fed) was well along its path to normalize short-term interest rates and shrink its massive balance sheet, reversing a decade of cheap money and quantitative easing in a shift designed to provide the central bank with the flexibility to maneuver when the next recession hits. The Fed embarked on this tightening trail in late 2015, when former Chair Janet Yellen began to slowly, methodically remove the proverbial punch bowl.
Here we are on the eve of another rate-setting meeting by the Federal Open Market Committee (FOMC), and the markets seem to be feeling pretty good. The Dow Jones Industrial Average (the Dow) is coming off its best June since 1938, the S&P 500 Index since 1955, and both have reached new highs in July. Everything is perfect, right? So, pack your bags and head for your favorite beach or lakefront. We will see you after Labor Day!