Inverted Bond Curve and Trump’s Trade Tumult Tests Investors!

Grit is that ‘extra something’ that separates the most successful people from the rest. It’s the passion, perseverance, and stamina that we must channel in order to stick with our dreams until they become a reality. Travis Bradberry.

As people progress from a child and into adulthood, your schooling becomes a prominent part of your life. Naturally, some place a bigger priority on educational achievement than others, and a great deal of that emphasis comes from concerned parents. When one reaches higher levels of educational achievement, tests take on a particular emphasis. I am sure you are familiar with the lengths that a few prominent citizens went to in order to help their kids find a way into some of the best colleges in the country. Much of that is related to the standardized test scores the students must take as sophomores and juniors in high school. Tests are designed for people to demonstrate mastery of a body of knowledge. Most test questions have one right answer per question, unless the query is poorly designed. Writing and history questions often involve structured writing assignments where there may be more subjectivity to the grading. My point is that testing is part of the educational process in nearly every course of study. The reason why I bring this up is that the investment world is no different than education. Markets are going to test you, in many cases, repeatedly. Let’s delve further into that thought, shall we?

In looking around the financial world, there are a few issues to consider. At the top of the list is the trade tiff between the United States and China. Mr. Trump decided to include Mexico in the skirmish to have some leverage with the immigration and border issues which have been a source of contention between the Republicans and Democrats for a long time. England would like to leave the European Union, and Theresa May lost her job as Prime Minister because she could not find a way to get her own party to agree to the terms of the deal. Venezuela has long been falling apart, and oil production in that country has collapsed. U.S. sanctions on Iran’s oil exports have kicked in, and reports that monitors around China show big red skirting the sanctions by tracking ships carrying oil into Hong Kong from Iran. Russia continues to instigate in the middle east by supporting its ally, Syria. Mr. Trump’s good friend, the crazy leader of North Korea, decided to execute those responsible for the collapse of talks with the United States. In Israel, Prime Minister Netanyahu called for elections in the fall after failing to hold together his government. Last but not least, Robert Mueller decided to conduct a press conference confirming that the Justice Department’s investigation into Russia’s tampering of the 2016 election did not warrant charges against a sitting President, which held true before the country spent millions to go through the charade. Nevertheless, House Democrats decided to continue looking at whether the House should proceed with impeachment proceedings against Donald Trump. Not a midterm, mind you, definitely closer to a final exam.

All of these political events certainly do not lend confidence to a tired investor class. In the financial realm, the dreaded inverted yield curve reared its head again this week, and there are over a trillion dollars worth of bonds across the world which have negative yields. Those facts make investment professionals, many which have excelled at tests their whole lives, to look backward at history and come up with the deduction that negative yields and inverted yield curves mean a recession is coming. In combination, investors are being tested, repeatedly and severely, in terms of their conviction levels about a good economy and nice growth prospects. Of course, there is one other fact to consider.

Over the first four months, equity markets were up nearly 20 percent, clawing back much of the e lost ground during the selloff in the last quarter of 2018. It may very well be that investors are looking at the world, looking at their gains, considering what took place during the end of last year, and saying, “Not for me,” meaning, its time to take a breather and sell. So, in sum, if you believe in equities, as I do, this is merely a test. I suspect we will pass it, and quite well, thank you. It may very much take some time to get our A, but rest assured, the honor roll awaits.

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Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog, Investing in securities involves risk and the potential loss of ones principal. Past performance is no guarantee of future results. All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one’s overall financial situation. The fact that Yale Bock has earned the right to use the Chartered Financial Analyst in no way means or guarantee performance better than market indexes.

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