Following a challenging December, the financial markets recovered in the first quarter just as rapidly as they fell, reflecting the volatile investment environment we navigate. As we wrote to you in December, we expected recovery and added cautiously to portfolios in the early part of the year.
While it’s impossible to know if this recovery will last, we are continually monitoring the economic backdrop and its potential impact on your portfolio. Chief on our list is the current position of the yield curve (the difference between short and long-term interest rates). Typically, the yield curve is upward sloping to the right, a function of long-term rates exceeding short-term rates. Intuitively, the longer you are willing to lend another party money, the more interest you require to compensate you for that risk. But in the later stages of economic expansions (like the one we are currently in), the curve tends to flatten as the Federal Reserve raises short-term rates to combat inflation and an overheating economy, while weaker expectations for future growth drive long term rates lower. Often near the cycle peak, the yield curve may actually invert and slope downward, with rates in the short term exceeding those of the long term. This occurred in the first quarter, a noteworthy event because every recession in the modern history has been preceded by an inverted yield curve.
Are we entering recession? We most certainly won’t know until after the fact. And interestingly, IF the yield curve predicts the next recession it could be months or even years away. Predicting the timing is a losing proposition. Further, as always, this time is different. The Fed has come under increasing criticism about the pace at which it has raised rates. The bond market is now increasingly pricing in the probability of a rate cut vs. a hike as we proceed through 2019-2020. Time will only tell if the Fed’s bias to combat inflation at the expense of economic growth was prescient or premature, and the inverting yield curve may not tell the whole story.
As you learned in a previous mailing, Greenwood Gearhart is undergoing a comprehensive rebalancing of your portfolio as we continually refine our portfolio management process. This process allows us to capitalize on volatility and ensure you are appropriately positioned for the future. While implementing these changes, you may see an increased number of trades within your portfolio. Fortunately, because of our long-term relationship with Charles Schwab, we have negotiated a temporary relief to your commission structure from $4.95 per trade to $2.50 per trade while we undergo the rebalancing. Should you have any questions about this process, please don’t hesitate to contact us.
As always, many thanks for your trust and confidence in our firm.
G. Brock Gearhart, CFA
President & Chief Executive Officer
Download a pdf of the Quarter 1 2019 Market Commentary through the link below.
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