The Inverted Yield Curve Doesn't Mean a Bear Market is Imminent
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NUVEEN ASSET MANAGEMENT
The Inverted Yield Curve Doesn't Mean
a Bear Market is Imminent
IMPORTANT NOTICE
The following material is provided by a third-party strategist unaffiliated with AssetMark. The
strategist is solely responsible for its content. Please read the risks and disclosures section for
additional important information. AssetMark has not verified the accuracy of the information
contained in this material.
For financial advisor use with advisory clients.
C33473 | 03/2019 | EXP 06/30/2020
AssetMark, Inc. is an investment adviser registered with the Securities and Exchange Commission.Weekly Investment
Commentary
25 March 2019
The inverted yield curve
doesn’t mean a bear
market is imminent
Last week’s financial news was dominated by a more-dovish-than-expected
Federal Reserve meeting on Wednesday and the 3-month/10-year segment
of the U.S. Treasury yield curve inverting on Friday for the first time since
2007.1 Stocks sold off on Friday, with many media outlets predicting that a
recession and equity bear market would be on the horizon as a result. The
S&P 500 Index fell 0.8% for the week, with cyclical sectors such as materials
and industrials lagging.1 Defensive stocks fared better and consumer
discretionary outperformed as the retail sector remained resilient.1
HIGHLIGHTS
• The inverted yield curve is a typical event in the
latter stages of an economic cycle. It likely is a
recession signal, but the timing is uncertain.
Robert C. Doll, CFA
We think this current economic and market
Senior Portfolio Manager
cycle could still last for years. and Chief Equity Strategist
• Global monetary policy remains equity-market
Bob Doll serves as a leading
friendly, but much of the good news is baked in.
member of the equities investing
We expect near-term stock market volatility, team for Nuveen, providing
but also prospects for price appreciation over reasoned analysis through equity
the long-term. portfolio management and ongoing
market commentary.
NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUEWeekly top themes
The yield curve inversion may signal an eventual recession, but it tells
us nothing about timing. An inverting yield curve typically occurs in the later
part of an economic cycle, but the time lag between inversion and recession can be
long and highly variable. In recent cycles, it ranged as short as one year for the
1981-1982 recession and as long as three years for the 2001 recession.1 Likewise,
since equity bear markets are usually associated with recessions, a yield curve
inversion does not signal a near-term end to the bull market. Once investors
recognize this, we think markets will refocus on fundamentals. The bad news
is that fundamentals may not look great for the coming weeks and months.
U.S. economic data continues to soften. The March flash Purchasing
Managers’ Index results showed a decline in both manufacturing and services.2
The overall news flow may turn more negative in the coming weeks.
We think earnings pre-announcements are likely to skew to the downside and trade
news will remain uneven. And after last week’s Fed announcement, it’s hard to
imagine how the central bank could get any more dovish, meaning good news on
rates is probably already baked into the markets.
China’s economy is also slowing. Manufacturing is weak, auto sales aren’t
improving and both imports and exports are contracting. With the government
trying to jumpstart growth, we don’t think China’s economic prospects are dismal,
but growth is weakening.
Trade policy risks will likely remain for some time. Actual and threatened
tariffs are a drag on global economic growth and policy uncertainty is a negative for
corporate earnings.
The U.S. dollar is likely to weaken over the course of 2019. If global
economic growth expectations remain soft, there is room for additional dollar
strength. However, we expect the global economy will recover, which should
put downward pressure on the dollar.
We think budget negotiations this fall could produce market risks.
We may see a combination of another shutdown, a failure to raise the debt ceiling
and/or a sequester that forces spending cuts. But we think it is more likely that
a deal emerges that keeps spending levels constant, if not slightly higher.
2 | Weekly investment commentary 25 March 2019Global monetary policy remains
supportive for stocks and other 2019 PERFORMANCE YEAR TO DATE Returns
risk assets Weekly YTD
The Fed’s comments last week suggested that S&P 500 -0.8% 12.3%
additional rate cuts were off the table for sometime.
Dow Jones Industrial Avg -1.3% 10.0%
Other central banks have abandoned tightening,
meaning global monetary policy remains highly NASDAQ Composite -0.6% 15.5%
accommodative. At this point, central banks are Russell 2000 Index -3.1% 12.0%
betting that either inflation is not a risk, or that it Euro Stoxx 50 -2.5% 9.1%
is a risk worth taking if it reduces the chances of
FTSE 100 (UK) -0.8% 12.2%
recession and deflation.
DAX (Germany) -3.0% 6.3%
As such, we think policy overall remains a positive
Nikkei 225 (Japan) 2.2% 8.5%
for stocks and other risk assets. Bond yields are likely
Hang Seng (Hong Kong) 0.4% 12.8%
to remain depressed in the near term as investors
remain concerned over growth prospects. At some Shanghai Stock Exchange Composite (China) 2.7% 27.4%
point, we expect global economic growth to improve, MSCI EAFE -0.3% 10.2%
which should cause yields to rise somewhat and allow MSCI EM 0.2% 10.0%
stock prices to climb again.
Barclays US Agg Bond Index 0.9% 2.6%
Over the short-term, we think stocks are likely to BofA Merrill Lynch 3-mo T-bill 0.1% 0.5%
remain volatile and range-bound and might see a
further move to the downside. This shouldn’t be Source: Morningstar Direct, Bloomberg and FactSet as of 22 Mar 2019. All index returns are shown in U.S.
dollars. Past performance is no guarantee of future results. Index performance is shown for illustrative
surprising considering how quickly and how far purposes only. Index returns include reinvestment of income and do not reflect investment advisory and
prices jumped after the fourth-quarter selloff. other fees that would reduce performance in an actual client account. All indexes are unmanaged and
unavailable for direct investment.
Longer-term, we think stock prices have room
to move higher. The yield curve inversion suggests
that we’ll see a recession at some point in the U.S.,
but we expect stocks will still be able to move higher
before that happens.
“The yield curve inversion suggests
we’ll see a recession at some point,
but we expect stocks will still be able
to move higher before that happens.”
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1 Source: FactSet, Morningstar Direct and Bloomberg
2 Source: Markit Economics
The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy. The Dow Jones Industrial Average is
a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. The Nasdaq Composite is a stock market index of the common stocks
and similar securities listed on the NASDAQ stock market. The Russell 2000 Index measures the performance approximately 2,000 small cap companies in the Russell 3000
Index, which is made up of 3,000 of the biggest U.S. stocks. Euro Stoxx 50 is an index of 50 of the largest and most liquid stocks of companies in the eurozone. FTSE 100 Index
is a capitalization-weighted index of the 100 most highly capitalized companies traded on the London Stock Exchange. Deutsche Borse AG German Stock Index (DAX Index) is
a total return index of 30 selected German blue chip stocks traded on the Frankfurt Stock Exchange. Nikkei 225 Index is a price-weighted average of 225 top-rated Japanese
companies listed in the First Section of the Tokyo Stock Exchange. Hong Kong Hang Seng Index is a free-float capitalization-weighted index of selection of companies from the Stock
Exchange of Hong Kong. Shanghai Stock Exchange Composite is a capitalization-weighted index that tracks the daily price performance of all A-shares and B-shares listed on
the Shanghai Stock Exchange. MSCI EAFE Index is a free float-adjusted market capitalization weighted index designed to measure developed market equity performance, excluding
the U.S. and Canada. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging
markets. Bloomberg Barclays U.S. Aggregate Bond Index covers the U.S. investment grade fixed rate bond market. The BofA Merrill Lynch 3-Month U.S. Treasury Bill Index is
an unmanaged market index of U.S. Treasury securities maturing in 90 days that assumes reinvestment of all income.
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy or sell securities, and is not provided in a fiduciary capacity. The
information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions
should be made based on an investor’s objectives and circumstances and in consultation with his or her advisors.
Risks and other important considerations
The views and opinions expressed are for informational and educational purposes only as of the date of writing and may change at any time based on market or other conditions
and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and
should not be considered specific legal, investment or tax advice. The information provided does not take into account the specific objectives, financial situation, or particular needs
of any specific person. All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity
investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic
decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise,
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