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In these notes, we reward those of you who have been clamoring for more on the yield curve. Ok, that’s a lame attempt at economic humor - it’s entirely possible that no one has ever clamored for more on the yield curve. But the yield curve is back in the news and is quite important to understanding financial markets and potentially recessions, so we dig into it again. Since reading about the yield curve can be a slog, in a word, we’ll reward our readers by taking a break from talking about China and trade. The news on that topic tends to go up and down by the week, and I expect that we’ll return to it soon as it’s a market mover.

• Back to the Yield Curve Future: An inverted yield curve, meaning that short term interest rates have moved higher than long term rates, has been a reasonably reliable predictor of a coming recession. Within the last week, the 2 Year Note yield edged higher than the 5 Year Note yield, causing some consternation. As I write this, the yield on a 2 Year Treasury Note is the same as the yield on a 5 Year Treasury Note at 2.77%. We believe, however, that the appropriate yield curve comparison is the 3 Month Treasury Bill rate at @2.4% to the 10 Year Treasury yield at @2.9%, still a healthy positive slope. This San Francisco Federal Reserve Bank paper explains why.

One word to describe the current market environment is uneasy. There are a lot of uncertainties about U.S. and China trade, economic growth, and the direction of Fed interest rates. All of those issues are intertwined and impacting the economy and markets. Almost lost in the noise this week is the Mueller investigation which also hangs in the air. And that looks like it will soon move to the forefront. But the nation took a pause from the headlines mid-week to remember President George H.W. Bush.

Thank you for taking a few minutes of your time to read and share The Friday Buzz.

• Few Think a Recession is Near: Despite all the volatility and slowing growth, few economists or market watchers feel we are on the precipice of a recession. The consensus seems to be that the economy is slowing from high growth to a much lower level of growth, but not recession.

With the Fed signaling that it may slow the pace of interest rate increases, the stock market is getting some good news. Concerns like trade conflicts and Brexit remain but knowing that the Fed is flexible when it comes to pushing rates up bolsters the positive case for equities.

Thanks to all who read these notes. We enjoy writing them and endeavor to make them worthy of a modest time commitment on your part.

• Powell Boosts Markets: Fed Chairman Powell indicates that rates are slightly below a "neutral" level. In lay speak, this means that current rates are close to the point that they neither encourage nor discourage economic growth. It signals less tightening in the form of rate hikes for the foreseeable future. We anticipated this “signal” but are still reassured to hear a public statement, given the headwinds facing the stock market. 

I hope everyone had an enjoyable Thanksgiving meal and time with friends and family.  The Smith household always has a nice relaxing day for this holiday.  But the markets this week were anything but relaxed.  Previously high-flying tech stocks have borne the brunt of the last month's volatility, dragging down the overall market.  This is against a backdrop of solid, albeit slowing, economic data.   The volatility will probably continue until there is a catalyst to change sentiment and momentum.  So, enjoy this week's edition of The Friday Buzz, along with those leftovers from Thursday! 

• U.S. and China Tussle at APEC:  Twenty-one nations representing 60 percent of the global economy met in New Guinea at the Asia Pacific Economic Cooperation Summit.  At the summit the U.S. and China did anything but "cooperate."  Both dug in their heels and restated their current positions. There was not even agreement on a joint statement for all the countries, which has occurred at every other summit since 1989.  This does not bode well for when President Trump and President Xi are supposed to meet at the G20 Summit in Argentina late next week.

As most know we firmly believe that economic fundamentals and policy matter more to the markets than politics. But this week has been unsettling from a political and national leadership standpoint. Some key elections are still bitterly contested. News has leaked that more Mueller indictments are coming. The Trump administration appears to be beset with infighting and turmoil. We continue to have chilly relationships with historical European allies. And then there are the horrific California fires.

To the extent that this sense of national unease is widely shared, one wonders if it is casting a chill on the U.S. equity markets, notwithstanding solid fundamentals. Nevertheless, we remind ourselves that the historical pattern of the U.S. stock market has been to perform well after midterm elections through year end.

• China Trade Talks Revived: Trade conflicts with China are probably the biggest cloud over equity markets now, so news of revived talks is welcomed. This CNN article has some useful details around the issues. Clashes among Trump's economic advisors are an important subplot in this important national issue. What advisors will ultimately have the President’s ear when it comes to making a deal?

Regardless of the results, everyone I know is happy to have the midterm elections over. It gets so nasty that you might wonder if all the political hot air contributes to global warming. Guess not but still…. In these notes we share a few post-election observations, along with noting some other topics, including an expert viewpoint on how trade issues may impact Maine and New Hampshire.

• Divided Government and Markets: Partisan gridlock is here with Republicans controlling the Senate and Democrats controlling the House. Our take is that the U.S. financial markets, which care more about economic fundamentals and policy, will be ok with this standoff. Trump will have difficulty getting any significant legislation passed but retains his veto power which he will use to protect the tax cuts and deregulation moves.
• More Women Headed to Congress: Actually, it's a record. I don’t see anything but upside to greater gender balance in our national leadership. 

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. 

• Stocks Recover Mid-Week:  The volatility continued in stocks this week.  On Monday all three major stock indexes were up strongly before reversing and ending the day down.  During trading Monday, all three major indexes, the Dow, NASDAQ, and S&P were in correction territory, which is defined as being 10% below their peak.  By Wednesday the S&P had finished up two consecutive days in a row for the first time for October. 

• GDP Still Going Strong:  Last Friday the Commerce Department reported that the economy grew at a 3.5% annual rate in the third quarter after adjusting for inflation.  The second quarter growth rate was 4.2%.  Those might be the highest rates we see in a while as the Atlanta Fed expects 4^th quarter growth to come in at 2.6% and the Federal Reserve believes the next few years will come in even a little lower.

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.

With the U.S. stock market recovering from its late unpleasantness and the U.S. midterm elections and Mueller investigation outcome looming on the horizon, we focus on some other  topics, some of which have enormous implications.  We hope that you find these notes informative, interesting and worth a few minutes of your time.

There was significant financial news this week with the big drop in stocks on Wednesday, bond yields moving up, and the CPI reading coming in below expectations. In other news, once again, another major hurricane makes landfall. We hope everyone is safe in the Southeast, and our thoughts are with you. 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.

• Stocks Had a Tough Wednesday: The Dow Jones Industrial Average dropped 831 points on Wednesday. Volatility in the stock market has been relatively low the past few years so when it pops up, it is always a little startling. As of the deadline for this post Thursday, stocks were still volatile with prices zigzagging up and down. But many institutional investors were not panicking observing that corrections are normal and underlying economic fundamentals remain strong.