If we owned a crystal ball, we might know when to sell before big market moves down. If we owned a crystal ball, we might also know when to buy at the market low, before big moves up. Would you like to use a crystal ball for your investment timing tool? We know that if you rely on the crystal ball for investing, sooner or later you will be dining on crushed glass. No one owns a crystal ball that works. Don’t attempt to use one.

Given the volatility in the global and domestic markets this past week, it may be helpful to summarize a few thoughts for consideration:

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In recent days, the US financial market’s relative calm has fallen victim to rising fears relating to the coronavirus – more technically referred to as covid-19.  In just two days, the S&P500 and Dow have “skinnied” by more than -6% and the loss over the last week roughly -7.5%.  Many international markets are down even more sharply, especially amid already weak or recession-like economic data.  This is a stark contrast from the very attractive gains the market was enjoying in February as the narrative around the new virus seemed to be calming/contained from when it first began hitting newswires a month ago.

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Here we are… the final day of 2019 and 2^nd decade of the 21^st century.  The recent year provided stocks with their best annual performance in six years, but what a decade it’s been!  The current bull market has endured over its entire tenure, albeit like most trends it was not without many periods where it looked over.  If there was just one theme to characterize the economy and market direction over the recent 10 years, it would be “uncertainty”.  Uncertainty and relentless skepticism was borne from a sub-par economic recovery; financial repression via historic-low interest rates; and what feels like extreme political unrest both in the US and abroad.  But, financial markets often climb a wall of worry.  2019, and this current bull market, are testament to why time is each investor’s greatest ally and that one cannot allow themselves to invest based upon headlines or emotion.  Investment success is all about “time in the market”, not “timin’ the market”.

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On the heels of a September which was generally attractive, the markets entered October again looking spooky. In fact, like a year ago where the high for the year was observed on September 21, the S&P500 was off almost 4% between September 20 and October 2. That could be eerie for anyone paying close attention. In recent weeks, the US economic picture seems to be getting increasingly muddied by the sluggish international backdrop as fresh data ranging from manufacturing, services, inflation, and jobless claims all appears to be confirming a broad slowdown observable via downbeat readings coming in from abroad. Some meaningful market action reprieve arrived late last week as the US President offered a more optimistic narrative around current trade talks with China at the same time as reports of productive Brexit negotiations (a more than 2-year uncertainty at this point) we hitting the wires. Both domestic and international stocks jumped higher to end last week.

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US stocks broke a multi-week winning streak, but did so with very “sleepy” daily moves.  For the week ending September 20, the S&P500 gave up -0.5%, but remains +2.4% higher for the month.  International markets also slipped, but likewise were controlled in their daily moves.  Whereas the month of August was an alarmingly volatile period with 18 of the 22 trading days experiencing moves greater than ±1%, the S&P500 has closed up or down by less than 0.75% in each of the past 12 sessions – the longest such streak since the end of July.  Such streaks appear common in 2019 when investors look uncertain about the direction of the global economic outlook.

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Perhaps it’s just us, but we are struck with how surprised most clients are that the markets are very close to achieving full recovery of their all-time highs set in late-July.  Maybe that’s because the media wasted no time in bringing focus to how adversely financial markets reacted to abrasive tweets (Trade + Fed) from the US President last month; or the reporting that the yield curve inverted – a somewhat technical concept that few mom & pop investors/savers understand beyond being told that it has a decent historical record of signaling economic recession.  The overall mood can at best be described as sober.

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It was another roller-coaster ride of a week; one in which the most recent of market stress seemed to be attempting to mend.  In fact, until Friday, the market was up a little more than 1% and the VIX, a widely watched measure of market volatility was beginning to appear calm.   Investors appeared optimistic that Fed Chair Jay Powell would deliver a dovish and re-assuring tone during his speech in Jackson Hole, WY.  In fact, most believe he delivered what the market was looking for: a conciliatory tone acknowledging that global economic conditions have continued to weaken since the late-July cut and monetary policy increasingly looks out of sync with the global situation specifically citing escalating trade friction.

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If you watch the news today, it is almost certain you will learn the yield curve inverted (the 2yr/10yr spread) this morning for the first time since 2007.  This will probably result in a challenging market experience today (and perhaps days ahead).  You will also hear inversion – a condition where short term interest rates are higher than longer term rates – is significant because it sports a strong track record for correctly signaling that an economic recession develops at some point in the not distant future.  With the curve flattening for the better part of 18 months, and some maturities first inverting earlier this year, we’ve discussed why we too believe the curve slope is relevant and worth monitoring.  We do not dismiss the condition as insignificant; it signals that a policy mistake is being made and damage to the economy is building.  It is evidence that monetary policy is too tight for the current economic situation as a whole and will become restrictive.  The ongoing friction between the US and China over trade is part of that restrictive cocktail, and the Fed should not delay in responding further via additional rate cuts in the months ahead.

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Almost as quick as the calendar flipped to August, the market’s backdrop and investor sentiment was altered.  Just two weeks ago, the Fed made good on months of more dovish rhetoric by cutting its target for short-term interest rates by a quarter of one percent (25 bps).  While some watchers were pining for a more aggressive move, the adjustment seemed all that was warranted given a stock market near all-time highs, low levels of unemployment, and trade talks between the US and China that were reportedly making progress following a late-June G20 meeting between Trump and Xi.  But with a newspaper article and harsh tweet from Trump that fresh additional tariffs would be levied against China, the Fed’s easing move suddenly felt inadequate and behind the curve.  Tensions between the US and China are again heightened, and some are calling the process of negotiation all but collapsed as China allowed their currency to depreciate in retaliation and appears to be slow-walking/stalling the process.  They in no way seem urgent to strike a deal even as their economy is showing signs of stress as a result of tariffs.  Chinese leaders instead appear of the perspective that in the “long-game”, a weakened global and US economy hurts Trump’s chance of re-election in 2020 – and their odds of a more favorable “deal” are higher when considering the stated positions of Democratic party hopefuls.

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After beginning July with a strong posture, markets seem to be pausing to catch a breath.  Domestic equities slipped -1.2% during the week ending July 19, effectively halving the month-to-date performance.  It is challenging to point to any single factor or headline, but perhaps most notable is the reality that corporate earnings being reported for the 2Q period are soft.  When combined with the reality that the market as a whole is up handsomely YTD despite what seems to be persistent negative headlines (be it trade, geopolitical tension, yield curve inversion, etc), it’s not hard to understand why the investment community’s prevailing sentiment is that the good times will not last.

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