2019 1st Quarter Review

Transcript:

Thanks for joining me again for my quarterly review, where I break down some key events of the quarter.

As you may remember, we started off 2019 in the middle of a partial government shutdown that lasted from December 22 to January 25, making it the longest shutdown in US history. If you or someone you know is a government worker, then you certainly know how the shutdown affected individuals. But how did it affect the economy? Believe it or not, historically, government shutdowns have not had significant effects on the economy. On average over the previous 20 government shutdowns, the S&P declined by 0.4% but then climbed by an average 13% in the 12 months following the shutdown. So, despite short-term repercussions, according to historical evidence, economic growth is typically recouped. We’ll keep an eye out for the rest of the year to see how the shutdown may continue to have an impact.

The government shutdown wasn’t the only record set this past quarter! March 9, 2019 marked the 10-year anniversary of the bull market, making it the longest bull market in US history. If you were invested in the markets in 2009 at the beginning of the Great Recession, I’m sure you remember the hit your investments took. If anything, this bull market has truly shown us that patience is a virtue! Take a look at this chart.

Looking closely, we can see all the events that caused short-term declines – things like bailouts, foreign affairs, changes in administrations. Looking at the bigger picture, over these last 10 years, the S&P has rallied 400% including dividends, and the 10-year annual return was 17.5%. So, if you were patient and waited it out in the markets, you may have recovered a good portion of what you lost in 2009. However, if you’re nearing retirement age or already retired and still have your money at risk, you may want to consider getting out of the markets, given that the next market crash won’t be televised ahead of time so that you know to get out, and you may not want to let all your retirement dollars disappear right when you need them! If you would like to discuss options for protecting your retirement assets, give us a call!

Towards the end of the quarter, the bond market took headlines again due to the potential inversion of the yield curve. What does that mean and why does it matter?

According to Fidelity investments, “a yield curve is a way to measure bond investors’ feelings about risk, and can have a tremendous impact on the returns you receive on your investments.” If properly interpreted, it can also be used to help gauge the direction of the economy.

A normal yield curve means that bonds with shorter maturities expect lower yields, and bonds with longer maturities expect higher yields.

When the yield curve is inverted, the opposite is true. Essentially, bond purchasers get paid less for tying up their money for a longer period of time, which is counterintuitive.

What does this mean for the state of the economy? Well, in the past, recessions have been preceded by inverted yield curves. It’s an important signal and something that we must pay attention to, but it’s also important to note some nuances. First, the yield curve hasn’t been inverted for long enough at this point to indicate much more than the economy is slowing down, which we can expect after having been in a bull market for so long. An inverted yield curve needs to be realized for at least a full quarter, so we have some waiting to do. Second, an inverted yield curve is not necessarily a good indicator of the timing of a coming recession. In the past, 21 months on average passed in between inversions and recessions. Rather than using an inverted yield curve as a way to time the market, we can use it to start a discussion about your risk tolerance and make sure you’re properly invested for your goals.

Thanks for listening and, as always, give us a call if you have any questions!

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