2018 Year-End "To Do" List

Last week, we crawled into our attic to retrieve the Christmas tree (allergies in our house consign us to the artificial variety) and about half a dozen boxes that contain the decorations that will adorn the inside of our home for the next month or so. Today, the lights went up on the outside of the house.

We have already received our first Christmas card in the mail and even attended our first holiday party last weekend. Ready or not, the holiday season is upon us.

If you are like me, you have a long list of things to do over the coming weeks. If you are like just about everyone else, you probably don’t have personal financial tasks at the top of your list. While there are always a few things we should all do, with recent market volatility and the passage of The Tax Cuts and Jobs Act, there may be some items that differ from past years.

Curves Ahead!

US stocks have been mostly down lately. Domestic stocks had largely defied the selloff seen in global markets for much of the year, but recently have given back most of their year-to-date gains. Some point to the slowdown as being caused by new tariffs resulting from trade disputes with China. Others suggest it is due to rising interest rates, primarily on the short-term end of the market.

Put simply, if the Fed wants to cool off the economy, they can raise the interest rates that banks pay for short term borrowing. Those higher costs are then passed on to borrowers, making people less likely to take out loans. Fewer loans equals less investment and spending, which leads to less economic activity. Usually, when the Fed is worried about a hot economy, long-term rates also rise as inflation concerns increase.

Sometimes, however, longer term interest rates stay down while the Fed raises short term rates. This is because longer term rates are market driven. If the market doesn’t collectively believe the economy is heating up enough to create inflation, then long term interest rates will typically stay low.

A yield curve gives a snapshot of how yields vary across bonds of similar credit quality, but different maturities, at a specific point in time. For example, the US Treasury yield curve indicates the yields of US Treasury bonds across a range of maturities. Bond yields change as markets digest news and events around the world, which also causes yield curves to move and change shape over time.

Historically, yield curves have mostly been upwardly sloping (short-term rates lower than long-term rates), but when short term rates and long-term rates are about the same, it is referred to as a flat yield curve. When short term rates exceed those with longer terms, it is called an inverted curve. Stock market investors get nervous as yield curves flatten. That is mainly because the central bankers seem to be trying to take fuel from a fire that the bond market considers to be under control. The fear for equity investors is that the Fed will totally extinguish the economy, sending us into recession.

So, are flat or inverted curves something to fear?

Stock Market Correction Lessons

Stocks have been at or near a correction (defined as a 10% drop) for the last month or so. In the case of some foreign markets, the selloff has reached into bear market territory (20%+ drop). In virtually every market, gains earned early in the year have diminished or even turned to losses.

Headlines have been rife with commentators discussing “death crosses”, bursting bubbles, and falling knives. People that “called the last selloff” are featured with their latest predictions.

Stop me if you’ve seen this movie before.

If, however, you are on feeling as if you must do SOMETHING as a result of the recent volatility, please check out a couple of my articles written during another downturn back in 2015.