Recent Market Volatility in Perspective
f you’re following the news, you know that financial markets across the globe have experienced increased volatility in recent weeks from trade concerns, protests in Hong Kong, and political uncertainty. The volatility was exacerbated this week largely due to the inverted yield curve – which is when certain intermediate and long-term Treasuries yield less than shorter-term Treasuries. In this case, the concern was raised due to the yield on two-year Treasury notes being slightly higher than that of the 10-year Treasury note. Many market prognosticators tie this to an immediate sign of recession, but the data below deserves consideration. Here’s what the yield curve currently looks like:
While no one is able to predict the future, it’s interesting to note that on average, the S&P 500 has returned 2.5% after a yield-curve inversion in the three months after the episode, while it has gained 4.87% in the following six months, 13.48% a year after, 14.73% in the following two years, and 16.41% three years out, according to Dow Jones Market Data. On top of all that, a yield-curve inversion doesn’t usually result in an economic recession instantly. From 1956, past recessions have started on average around 15 months after an inversion of the 2-year/10-year spread occurred, according to Bank of America Merrill Lynch.
As financial advisor, we appreciate how unnerving it can be to watch this type of volatility, especially for retired clients. Then top it off with 24-hour media coverage (made for traders and not investors) and it can seem like the markets have been tumbling for months, when in fact the S&P 500 is still having a strong year and currently sits just 6% lower than its record high.
So, although we know this is uncomfortable, the best way to manage market declines is to maintain your long-term outlook, with a diversified portfolio across multiple asset classes. History shows us that the market generally does recover from these dips. As always, we are closely monitoring market conditions, and are here to help with perspective or reassurance if you want to discuss your portfolio or any other concerns.