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Whipsawed

Whipsawed! That is how I feel after the actions of the stock markets over the past few days. On Monday, December 3rd, the Dow Jones Industrial Average rose over 287 points (1.13%) on positive news about the US-China tariff war coming out of the G-20 meeting in Argentina over the weekend. It appeared that the US and Chinese were resuming negotiations and that the Chinese would immediately begin purchasing some US agricultural and commodity products. On Tuesday the news turned negative. Investors began to wane in their enthusiasm over the tariff news. There was some confusion as to when the 90 day cease fire of the tariff war would actually start. And President Trump came out on Twitter saying that he was a “tariff man.” As a result, the Dow Jones Industrial Average dropped 799 points, or 3.1%! In addition, the bond market also began to show some problems. The two-year US Treasury Note had a higher yield than the five-year US Treasury Note. This is unusual because, historically, bonds with a longer maturity pay a higher yield than bonds with a shorter maturity. When this flips, as happened on Tuesday, it is called an inverted yield curve. Oftentimes an inverted yield curve is a precursor to a recession. So the inverted yield curve also placed downward pressure on the stock market.

Regarding yesterday’s huge price decline in the stock market, I think that will end up being much ado about nothing. Increasing Chinese tariffs has been taken off the table for the next 90 days. While I don’t think that all the trade problems with China will be resolved in this time period, I do think that enough progress will be made to assuage the fears on both sides. I also do not think that the US is heading towards a recession, even if the yield curve is temporarily inverted. The US economy remains strong, unemployment is low and bond yields, while rising in the US, are still low by historical standards. None of this would lead us into a recession. I think that the recent pull-back in the market offers investors the opportunity to purchase some world class stocks at discounted prices.

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December 5, 2018

Whipsawed

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