Stock Volatility Continues, The ECB Ending QE, and a Historical Find

Posted in , , , , , , , By David M. Smith

Enjoy this week's edition of The Friday Buzz.  I hope it's worthy of a few minutes of your time to wrap up your week and kick off the weekend. 

  • Stock Volatility Continues:  It was another volatile week on Wall Street.  The DJIA dropped just over 600 points on Wednesday.  The underlying fundamentals of the economy and reported company earnings are still sound.  What seems to have changed is investor sentiment and uneasiness despite the good numbers, as pointed out in this Bloomberg article.  Thursday, the markets were bouncing back by midday.  At times like this it is important for investors to remember stock volatility and pullbacks are normal, the big picture of the world economy still looks sound, and to stay focused on the long-term.
  • Bests Bond to Use for the Yield Curve:  With some investors flocking to U.S. bonds for safety this week, the media continues reporting on the yield curve.  The 2 and 10-year U.S. government bonds are mentioned most often.  But the best bonds to use are the 3-month and 10-year bonds when looking at the yield curve.  Don't take our word for it, take it from the Federal Reserve Bank of San Francisco.  The bank also released a report on the yield curve and what it is now telling us about a recession any time soon.  The conclusion was that a chance for a recession during the next twelve months was only slightly higher than for any random month over the last 30 years by comparison.  The author states structural factors may be keeping the yield curve flatter than it should be, an example of which is the ECB Quantitative Easing program.  This is a nice segue to…
  • European Central Bank to End QE:  The ECB's Quantitative Easing (QE) bond-buying program was scheduled to end this December.  Some investors questioned if that would be the case, but this week the ECB President Mario Draghi reiterated the commitment to end the bond-buying program.  This means that European Bond yields could start rising next year.  Since bond markets are global this could make it easier for U.S. bond yields to rise as well.
  • Global Central Banks In-Synch for 2019?  For the first time in years, global central banks may have synchronized monetary policies next year.  This contrasts with the last couple of years when the U.S. was raising rates (tightening) and the ECB and Bank of Japan remained at historic low rates.  Next year they may all be tightening.  Higher rates are not all bad since it reflects confidence in sustained global growth.  It could mean that recent dollar strengthening could recede which is good for U.S. exporters and multinationals.  And higher rates are good for savers and purchasers of bonds, though borrowing costs will increase across the globe.  But it is yet one more sign the world economy is getting back to normal after the Great Recession, which is a nice segue to…
  • Remembering Long-Term Capital Management:  Lost in the remembrances of the Great Recession lately was the precursor to the credit crisis.  Long-Term Capital Management (LTCM) was an investment firm that attracted billions from investors with a great pedigree of Nobel Prize winners at the helm.  LTCM had incredible returns the first few years, but 1998 the firm had reached for yield, had illiquid and huge derivative positions, plus lots of leverage.  Once trades quit working, it quickly unwound and jeopardized the credit markets and economy.  The Federal Reserve moved in and organized banks to unwind the trades and mitigate risk.  Apparently the lesson was lost, because it was repeated ten years later in a much larger fashion.  It is all captured in the book, "When Genius Failed, the Rise and Fall of LTCM."
  • A Tax Cut for the Middle Class?  This week President Trump announced plans for a 10% tax cut for the middle class that will be finalized next week.  The announcement took many off guard, including tax policy advisors, lobbyists, and even those close to the White House.  Many are skeptical as Congress is campaigning and in recess with only a lame duck session left this year.  No one is sure how anything could be accomplished in a week, let alone by the end of the year.  We shall see.
  • The U.S. and EU are Working on Resolving Trade Issues:  Both the U.S. and EU negotiators are trying to work out a trade agreement.  Both sides insist a deal will be made, and sooner rather than later.  There is much to gain by lowering tariffs and coordinating regulations with estimates of savings in the hundreds of billions
  • FICO is Changing:  Fair Isaac Corporation (FICO), is working on a new credit scoring formula.  The current formula is based solely on a creditor's payment history.  The new UltraFICO will include checking, savings, and money market activity.  The plan is for borrowers to have the ability to request an UltraFICO report if they feel FICO is not fully representing their true creditworthiness.
  • The World's Oldest Intact Ship Found:  An Anglo-Bulgarian research team announced this week they discovered the world's oldest known shipwreck in the Black Sea.  Found over a mile deep where there is little oxygen, it is perfectly preserved.  This coincides with the recent discovery of a Viking ship buried in a field in Norway.  Being a history buff, I'm constantly amazed how the advancement of technology is giving us the ability to learn about the past and giving us the opportunity to step back in time.   
  • Climate Change Could Affect the Price of Beer:  Researchers using weather models are predicting that barley growers may have difficulty adapting to extreme weather changes.  If the farmers cannot adapt to higher temperatures and more severe droughts, there will be less barley to go around which will drive up prices.  Something to ponder over your next IPA.

Thank you for taking the time to read The Friday Buzz.  Have a great weekend!

david-m-smith

About the Author David M. Smith

David is a Senior Financial Advisor and the firm’s Co-Chief Investment Officer. He has more than 20 years’ experience in the financial services industry and holds the highly respected Certified Investment Management Analyst™ and Certified Financial Planner™ designations; he is a Co-Managing Member of the firm.
Disclaimer and Disclosures: Past performance is no guarantee of future results. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. Our opinions are subject to change without notice as market and economic conditions shift.