View from the Chair: Windermere's Market Perspectives (September 2019)

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Turn on the TV, pick up your phone, or read most major newspapers as of late and you are likely to walk away with a rather unsettling feeling about investing. There is a seemingly omnipresent supply of confusing terminology (ie: yield curve inversion, recession, tariffs, trade war) and an equal supply of doomsday predictions. All this “noise” can cause anyone to lose their focus and confidence in their approach.

To help with this, we’ve put together five suggested actions you can take today to refocus and stay on track over the long term.

1.) Revisit your goals

I know what your’re thinking - “everyone gives this generic advice.” Perhaps you’re right - but I’d argue that it’s for a good reason - because it’s sound advice! Pulling ourselves out of the immediate daily action and directing our attention to our bigger picture goals is essential. How can you do this? Ask yourself a few questions: What is my longer-term return expectation? Will moving to cash/exiting the market increase my odds of reaching that? Do I need any money from my invested assets in the next 3-5 years, and if so, how much of that amount is already in cash or bonds that I can readily access? If I’m saving on a regular basis (ie: via a 401k paycheck contribution), is it so bad to be putting more money to work at lower levels? Is any area of my life really at risk given the decline in my investments - or do I have time to stay the course and trust in the process? Elevating the discussion always seems to lower the nerves

2.) Play the Next Shot

Hindsight is an investors’ worst enemy. It is so tempting to be drawn towards looking backwards - questioning things you should/could have done, being drawn towards safety at the exact wrong time, focusing on what could have been if you had only done XYZ. Fight this urge. The only “shot” we have to play is the next one. See #1 above - you’ve already outlined the entire game, so it should be relatively easy to see what the next shot should be.

3.) Buy low

Markets may be the only place of commerce where people prefer to NOT buy things on sale. If an asset class falls (and you are underweight in your overall allocation as a result of the decline), consider redeploying some funds in its direction. Keep a shopping list of companies (or ETFs or funds) that meet your criteria and as their prices come down, maybe you can buy them on sale!

4.) Stretch it out

Investing technology has come a long way. We used to have to wait for monthly statements to see the change in value. Now, we can watch the green or red figures and percentages second by second on our phones. Focusing on a day’s change (or even a year’s change) is a little short-sighted. Odds are you have been investing for years, if not decades. Stretch out your return time frame. How have you done in the past 5 years? The past 10 years? Since you started? My guess is that you have built wealth thru your investing efforts over time

5.) Talk it out

If we are left alone with our thoughts (or with CNBC on in the background on repeat), we can engage in a lot of inner dialogue and self-doubt. One of the best ways to combat this is to talk it out. Share your feelings with a spouse. Reach out to your financial advisor and review your financial plan. Don’t try to go it alone. Get your thoughts and concerns out in the open. Just by doing this, they often times don’t feel nearly as daunting

Invest on,


Yield Curve Inversion - What is it and what it means

August 15, 2019

If you were anywhere near financial news yesterday, you likely heard the term yield curve inversion more than a few times and observed a sharp equity sell-off.  We thought it was worth explaining what that term actually means – and why it may matter for investors


What are bonds again?

The global bond market represents trillions of dollars.  Bonds are financial instruments that companies and governments use to borrow money.  Every bond represents a promise to repay, plus a stated rate of interest for use of the funds over time (referred to as a yield or interest rate).

Wait, how is this different than a stock?

Stocks do not include any promise of repayment.  Instead, stocks represent a share of ownership in a business.  As an owner, you receive your pro rata share of the company’s earnings and growth over time

Got it.  Back to bonds - how are bonds priced?

Again, bonds are a promise to repay issued by a company or government.  Bonds tell a story about the underlying issuer as it’s important to know how likely they are to repay you.  A riskier issuer tends to have to pay more (ie: a higher yield) than a less risky issuer.  In addition, an issuer borrowing money for a longer period of time is willing to pay more (as investors want to be compensated for locking up money for longer and an issuer is willing to pay up to have access to those funds for a longer period)

What’s a yield curve?

The US government is one of the world’s largest bond issuers, with promises to repay at a variety of maturities (from 30 days all the way to 30 years).  The yield curve is the progression of US bond interest rates over the various maturities.  Said another way, if you plotted out the interest rates on each of the US debt maturities on a graph from shortest to longest in a “normal” state, the curve would steadily rise left to right.   Why?  Investors typically demand a higher return for locking up their funds for a longer period of time than a shorter one (and the US government is willing to pay more to have access to funds for a longer period of time).

So in steady state, the rate the US government will pay on a 10-year bond is higher than the rate they pay on a 2 year bond

What’s an inversion?

A yield curve inversion is when the graph we described above slopes downward, implying that shorter maturities pay more than longer maturities.

We saw this happen yesterday, when the rate on the US 2 year bond fell below that rate on the 10 year bond.  

How did this happen?

Bonds trade in the open market, just like stocks, and the pricing of them is driven by supply and demand.  If demand is higher than supply, the price goes up (and the yield thereby goes down as there is an inverse relationship between the two).  So, in recent weeks/months, there has been a higher demand for the 10 year bond than the 2 year bond.  This drives the price of the 10 year up (and the yield down). 

Why would investors favor the 10 year over the 2 year?  It seemingly indicates near-term uncertainty in the US’ promise to repay and implies more value in the 10 year promise versus the 2 year promise, as well as a desire to lock in that offered rate over 10 years

Why did stock markets react?

An inversion of the 2 year/10 year yield curve has been a predictor of recessions in the past, with the recession coming approximately 2 years after such an inversion.  Even though the inversion lasted only part of the trading day, it was enough to cause recession worries, trigger quant funds and algorithms, and lead to considerable equity selling

Is a recession a sure thing?

First, remember what a recession is.  It is NOT two quarters in a row of negative real gross domestic product (GDP) as is commonly believed. 

Rather,   a recession is “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” 

There are many data points that have been examined in hindsight after recessions that are now believed to be valuable predictors.  The 2 year/10 year yield curve inversion is one of these metrics.  Recessions has always followed a yield curve inversions - but remember there are also cases where the yield curve has inverted and a recession has not followed.   .

Any good news?

There is always good news. First, a decline in rates is excellent news for borrowers. If you have any debt (like a mortgage), you may want to look into refinancing at these lower rates. Second, while there is a lot of uncertainty and volatility, there remains many positives in the US and globally. If you are an investor and not a trader, you have prepared for this and can endure these moves. Stay focused and don’t rush to react.