The NWP Monthly Digest | August 2019
August brings into sharp focus and a furious boil everything I've been listening to in the late spring and summer - Henry Rollins
The summer appears to be wrapping up in unison with the global economic expansion. For the investment world, August brings waning economic growth into sharp focus and geopolitical issues we have been listening to in the late spring and summer to a furious boil. It’s difficult to ignore the tweeting from the president during this time of volatility. For that reason, we have noticed some of our client’s viewpoints have been vindicated by their political views. During this time, we have guided our left-leaning clients by letting them know it is not the end of the world. For our right-leaning clients, we try to explain the global recovery is not as sturdy as they believe. Let’s look at the facts instead of the perceptions. Democrats, Republicans, Centrists, Communists, Socialists, and unaffiliated individuals should take note of the current developments around the world.
To begin, ongoing trade wars have spurred a flight to safety as investor demand for safe assets proliferated. This backdrop created fertile grounds for the prices of bonds to skyrocket since November of last year. As a result, yields, which move in the opposite direction as bond prices, have fallen sharply. In fact, about $15 trillion of global bonds are now trading at yields below zero. That's right! To buy these issues, you would have to pay them to hold your money for you. It's a strange new time for investors.
In fact, the sovereign debt of German and Swiss government bonds has a negative yield across the entire yield curve – that means you owe these governments interest across all maturities to loan them money!
For those of you unfamiliar, an inversion of the yield curve (when long-dated maturities have a higher interest rate than shorter-dated maturities) can be an ominous signal for investors. In fact, an inversion of the yield curve has preceded each recession since 1980. Do you know where I am going with this? Of course you do. Yes, for the first time since 2007, the yield curve inverted on August 13, 2019, using the most popular measure of a yield curve inversion – the difference between the 10-year Treasury Bond and the 2-year Treasury Bond (the 10-year Treasury Bond and the 3-month Treasury Bond has been inverted for some time now). To investors – do not lose any sleep about this just yet. Since 1980, after the yield curve has inverted, a recession has occurred in as little as ten months but up to two years after the inversion, with an average of 18 months. So, take your time, stick to your long-term plan and be pragmatic with your strategy. Unfortunately, the stock market did not follow this advice after the yield curve inverted and the Dow Jones Industrial Average fell about 800 points that day. Complicating matters, China reported its slowest industrial production growth since 2002, and Germany reported a contraction economic growth for the second quarter.
There is a silver lining in these developments for those homeowner’s out there. Falling interest rates have brought mortgage issuance back from the dead. United States MBA Mortgage Applications weekly applications jumped 22% and are up 8.1% annually. This may be great news for those of you that bought or refinanced a home in the past two years. Under the appropriate circumstances, we have been advising some of our clients to refinance their debt. Maybe this is something you should explore....
Yields and mortgage rates aren't the only thing falling. On August 12, 2019, Argentina's stock market plummeted 48% in US dollar terms after the market-friendly President Mauricio Macri lost the Presidential primaries to Alberto Fernandez. This one-day drop in Argentina's stock market was the second largest one-day drop in any global stock market going back to 1950.
Did I just hear gold is up this year? Late in the economic cycle, investors have a proclivity to rush into safe-haven assets at the first sign of trouble. This may have helped gold break out of the doldrums it has been stuck in since prices peaked in 2011. Recently, the asset class has broken through its long-term resistance line as it has risen ~25% since the lows earlier this year. Meanwhile, gold miners are up about 41%. Our clients should know our balanced portfolios at Noble Wealth Partners have an allocation of almost 5% to gold and gold miner positions – I told you this newsletter was not all bad news. We have also benefited from our overweight position to medium-sized companies. Currently, our portfolios at Noble Wealth Partners are underweight risky assets and we avoid speculative credits. At this point in the year, we are cognizant about interest rate risk amidst a low rate environment. Is your portfolio performing as you thought it would during these volatile markets? If not, we would encourage you to call us to explore a new approach for your wealth.
Until recently, cannabis stocks were also flying high but the wild west days of the cannabis industry are long gone. Today, investors must navigate through an evolving industry to harvest their gains. Curious how? Click here to listen to our recent podcast where Grant interviews the 2017 CEO of the year according to the Cannabis Business Awards.
If you have kids, they are likely heading back to school with our summer intern, Austin Dilg. Austin has been a tremendous help this summer and we will miss him. In a bid farewell, Austin has prepared a piece on the Federal Reserve’s dual mandate of stable prices and full employment. Does the Fed have the necessary tools to revitalize this expansion? Click here to read Austin’s article. We know his professors will enjoy it, and we hope you do too!
Until next month,
Your team at Noble Wealth Partners
Want to set up a time to speak to us? Schedule an appointment by clicking here.