Latest Economic Data Does Not Align With Yield Curve Fears

According to numerous articles written in the last six months, a flattening yield curve nearing the zero boundary is a major red flag for stocks and the economy. 

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DATA THIS WEEK LOOKS STRONG

Monday's ISM Manufacturing data landed in a "strong and growing economy" range and nowhere near an "imminent recession" range.  From MarketWatch:

The Institute for Supply Management said its manufacturing index rose to 60.2% last month from 58.7% in May. That matches the second highest level of the current economic expansion that began in mid-2009. In February the index hit a 14-year high. Readings over 50% indicate more companies are expanding instead of shrinking.

During the holiday-abbreviated session Tuesday, the latest read on factory orders was released.  From MarketWatch:

U.S. factory orders rose 0.4% in May, led by an increase in demand for machinery and military wares. Economists polled by MarketWatch has forecast no change. The originally reported 0.8% decline in factory orders in April, meanwhile, was revised down to show a 0.4% drop, the government said Tuesday.

THE MISUNDERSTOOD YIELD CURVE

This week's video takes a detailed and factual look at the yield curve, helping us address the following questions:

  • Is it possible for really good things to happen after a period that features a flattening  yield curve?
  • If the yield curve continues to fall, should we sprint for the nearest exit?
  • Is there any historical difference between "the yield curve is about to invert" and "the yield curve has already inverted"?
  • In the 2000 and 2007 cases, how long did it take for the major stock market peak to arrive after the first sign of yield curve inversion? 
  • In the 2000 and 2007 cases, how much did the S&P 500 gain between the first sign of yield curve inversion and the major market peak? 

Misconceptions About Volatility Can Lead To Investor Missteps

VOLATILITY IS ALWAYS STRESSFUL

With lingering concerns about trade, markets sold off Monday with all three major U.S. indexes posting intraday declines of greater than 1%.  Red screens create stress and doubt.  Therefore, it can be helpful to take a step back and check the big picture. 

In August 2016, the S&P 500's 30, 40, and 50 week moving averages told us to be open to better than expected outcomes from a long-term perspective.  The chart below shows the same moving averages as of 1:15 pm ET Monday.  The NASDAQ's chart looks even better. 

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To give us a bearish reference point, the same weekly moving averages over a one-year period in 2007-08 are shown below.

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The daily chart below shows the S&P 500's 200-day moving average as of 1:28 pm ET Monday.  The NASDAQ's 200-day paints a similar picture. 

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To give us a bearish reference point, below is the same 200-day moving average over a one-year period in 2007-08.

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SOME HISTORICAL PERSPECTIVE

In May 2003, stocks had made little progress YTD.  Despite numerous swings up and down into year-end, the S&P 500 finished with a very satisfying gain of 26.38%.  Day-to-day volatility provided little in the way of useful information between points A and B. 

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2004 featured numerous bouts of stress-inducing volatility, including the S&P 500 moving into negative territory YTD numerous times.  Patient investors were rewarded with a gain of almost 9%.  Even in the context of a longer-term bullish trend, volatility is to be expected. 

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Trying to trade between point A and point B in 2005 proved to be a difficult task. When the volatility dust settled at the end of the year, the S&P 500 managed to post a positive gain.

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2006 featured several moves above and below the S&P 500's 200-day moving average, along with a push into negative YTD territory as late as July.  Once the summer doldrums passed, stocks rallied hard into year-end providing patient investors with a satisfying gain of 13.62%.

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NASDAQ:  BUBBLE OR OPPORTUNITY?

This week's video takes a very long-term view of the NASDAQ using quarterly charts, allowing us to address the following question:

Does the NASDAQ look more like a bubble that is about to pop or a long-term opportunity for investors?

 

RESPECTING CONCERNS ABOUT TRADE

Based on the facts in hand today, the market's longer-term trend remains constructive.  With ongoing uncertainty related to the economic impact of trade tensions, it is important we continue to review the data day-by-day with a flexible, unbiased, and open mind.