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Markets seem to be suffering from whiplash recently, with larger daily market moves. What are the current signals telling you as a long-term investor, and how should you react?
Three main issues continue to be front and center for global markets:
Despite some good news about negotiations with China, escalating tariffs are creating a lot of uncertainty as well as slowing trade and global growth. Sturdy job and wage growth can support consumer spending, so we expect the economy to slow but not head into recession, partly due to the Fed’s shift toward additional interest rate cuts.
The result of all this has been higher volatility, however. Stock and bond prices have been moving sharply both up and down as expectations change. But we believe the still-positive fundamentals of modest economic growth, low interest rates and near-average valuations can support rising stock prices over time.
Global trade is flat but not falling, despite the slump in manufacturing. The issues surrounding U.S.-China trade are complex and not likely to be resolved quickly, and concerns about the impacts of higher tariffs and heightened trade tensions have certainly weighed on stocks. Other possible trade disputes and geopolitical risks are also elevated, which is why we don’t expect trade worries or these fluctuations to disappear anytime soon. But importantly, we also don’t believe they are signaling an impending recession.
Traditionally, a long-term bond has a higher interest rate than a short-term bond because your money is tied up longer. When short-term rates are higher than long-term rates, this is referred to as an inverted yield curve.
This is an important signal because six recent recessions started between six months and almost two years after the yield curve inverted. But it isn’t a very timely signal – you’ll notice that’s a wide time frame, and there were also two instances when no recession followed. So even if a recession is ahead, it may not start soon. And keep in mind that the yield curve doesn’t predict short-term stock market moves.
Instead of trying to guess when a recession will occur, you should use the inverted yield curve as your signal to prepare for higher volatility. This would be a good time to talk to your financial advisor about whether your portfolio has the right mix of stocks and bonds for your comfort with risk, time horizon and goals. Negative interest rates are perplexing, but we don’t think they’re likely here.
Negative rates are the result of central bank policies in Europe and Japan, combined with much slower economic growth and lower inflation than in the U.S.
But pushing rates below zero hasn’t boosted growth or inflation as hoped. Although U.S. interest rates are low, they’re well above zero, giving the Fed room to cut rates further. And if necessary, the Fed could use other tactics to help keep the expansion going.
As a result, we think U.S. rates are likely to remain low but won’t fall below zero. Be sure you own an appropriate percent in cash and bonds to help reduce fluctuations in the value of your investment portfolio. Bond prices tend to rise when stock prices fall, making it easier to stay invested through volatile times.
Consumer spending, which makes up about 70% of economic growth, is still healthy. The U.S. unemployment rate is near a 50-year low, and wages were up 3.2% over the past year, giving consumers the ability to spend. Low interest rates and rising federal government spending are also helping keep the economy growing. But keep in mind that the path is likely to be bumpy. We think many of today’s challenges could continue to trigger short-term volatility, even though our outlook remains positive.
Don’t anticipate problems that haven’t happened yet. Stay invested despite the uncertainty, preparing for continuing volatility with a well-balanced portfolio. Don’t try to time the market by making bigger investment moves or staying in cash to avoid a downturn that may not happen.
Past performance does not guarantee future results.
Investors should understand the risks involved of owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates and investors can lose some or all of their principal.
Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.
This information is for educational and illustrative purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation.
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