(New York)

The big market ruction of the last few days has sent the yield curve inversion to very worrying levels. The spread between three-month bills and ten-year Treasuries has widened to minus 32 basis points. A yield curve inversion has preceded every recession for the last 50 years. “The US has been an island of prosperity in a sea of weakness, but that looks to be ending as the impact on the consumer side from the new tariffs is likely to be bigger than the previous ones”, said a senior portfolio manager at PGIM fixed income.

FINSUM: The last time the yield curve was this inverted was April 2007. That fact alone is major warning sign.

(New York)

Markets took a nosedive yesterday. Last week was bad, but yesterday’s falls were so steep they amounted to about as much as all of last week. All fears over rates and the trade war came to a head when Trump labeled China a currency manipulator. The S&P 500 fell about 3%, meaning the total decline in the index since last week is around 6%. The Dow lost 760 points. The losses amounted to the worst single day drop since early 2018.

FINSUM: The “currency manipulator” claim is largely symbolic. While it certainly won’t help a deal get done, it is hard to see it having a tangible outcome. This seems like a lot of pent-up market anxiety manifesting itself.

(New York)

Buyback stocks have developed a poor reputation recently. Stock buybacks are seen as financially irresponsible and a way for executives to manipulate earnings and share prices. While that may be true to a degree, they also happen to be a great way for companies to return money to shareholders. Additionally, and what is not well understood, is that buyback stocks have a great track record historically. Since 1995, the one hundred S&P 500 stocks with the highest level of buybacks have significantly outperformed the index, earning a 13% return versus the index’s 10%. The same is true for the Russell 3000, so it is not just a case of buybacks working for large caps.

FINSUM: Yes, buybacks may be at their highest total levels historically, but they are flat as a percentage of earnings, so buying hasn’t been any less conservative than in the past. The other good thing is that buyback stocks are usually cheaper than average.

(Washington)

Trump’s tariffs are having a major impact on the US’ trading relationships. The data has been showing such, but now there is a very significant data point: China is no longer the US’ largest trading partner. Mexico has now assumed that position. The decline in trade with China comes alongside an escalating trade war that has seen tariff hikes and restrictions on both sides.

FINSUM: We are now officially of the position that this trade war with China will not be resolved any time soon, so this decline in trading seems to be the end of an era.

(New York)

The market is in the worst shape it has been for some time, maybe the worst condition of the year. The S&P 500 fell over 3% last week on the combined news of a less dovish Fed and a huge tariff increase on China. Where things go from here is very uncertain, but JP Morgan is arguing that you should buy the dip. The bank’s strategists summarize their view this way, saying “Our core view remains that one should use the prospective weakness as an opportunity to add further, similar to the May experience. We continue to believe that global equities will advance further before the next U.S. recession strikes. We think that the growth-policy trade-off is far better now than it was in 2018”.

FINSUM: The market, economy, and politics are at quite a confusing point right now. Either things will gel to send prices higher, or it will all come crashing down like it did last year. Anyone’s guess.

(Houston)

The Chinese Yuan reached a landmark and worrying level today. It fell to below 7 versus the Dollar, marking its weakest point in 11 years. The weakening currency could help Beijing offset economic weakness from tariffs. “We will see a new wave of depreciation among Asian currencies in the foreseeable future, and there could be further risk-off movements in the global markets. It looks like a tsunami is coming”, said an economist at Commerzbank. This will have major implications for commodities as China is the world’s biggest consumer, and now that the currency is weaker, it will be harder to buy, meaning prices must come down.

FINSUM: Dollar prices for commodities (almost all are priced in Dollars) will need to come down commensurately with the Yuan in order for the Chinese to maintain their purchasing power.

(New York)

Retirement income is such an important aspect of a financial advisor’s job, that one could reasonably argue it is the main duty of the profession. With that in mind, here are a couple ways to create lasting retirement income for clients. The first tip is simple, and every advisor should know it—delay claiming Social Security until 70, which significantly boosts annual income. Social Security is uniquely built to help protect against many of the risks of retirement, with one specialist saying “It’s indexed for inflation, it protects against longevity risk, and if the stock market crashes, it doesn’t go down”. The second part of this two-part strategy is to invest like one is still young. Since once is more hedged by greater Social Security income, one can afford to be more aggressive in markets.

FINSUM: This is a good basic strategy, though it requires working longer and a good degree of self-control.

(Berlin)

The future of the EU is an open question, and one that seems to be growing bleaker once again. Much of the cultural mood that preceded Brexit is now taking hold in Germany. German media is angry at the ECB about robbing its savers of income with very low or negative interest rates. News outlets refer to the “expropriation” of German assets (a term with huge historical resonance). Altogether, the German people are angry about their wealth funding the rest of an EU they see as squandering it.

FINSUM: Germany has benefitted disproportionately from the Euro as it keeps their currency artificially weak. Yet it is also true that hard working Germans have been subsidizing the irresponsible finances of southern Europeans for years. It seems a way off, but Germany could be the next EU domino.

(New York)

The market is going through a fit, and it is entirely self-induced. Firstly, the Fed hit markets with an unexpected lack of dovishness earlier this week. Then, just a day after, President Trump did what many feared he would—he announced another large round of tariff hikes on $300 bn of Chinese goods. Many suspect the move is part of an effort to push the Fed into cutting rates after it downgraded its language to calling the trade war merely a “simmer”. Markets fell sharply on the news.

FINSUM: Trump is trying to push both China and the Fed. It will likely work with the former, as they don’t have much of a choice if the economy looks vulnerable, but this is certainly not going to help China get back to the table.

(New York)

The rate cut is not like investors hoped. While the key rate was cut 25 basis point, it did not come with a wealth of dovish future guidance. Still, the cut is going to make a big impact in certain areas, not the least of which is in growth stocks. Growth stocks are likely to pull further ahead of value stocks as “In an environment where rates indeed go lower, growth stocks are just mathematically worth more”, according to MFS strategist Rob Almeida, continuing “So the terminal value for a growth company is higher, because of the discount rate, than it is for a cyclical company”.

FINSUM: The truth is that growth stocks have been doing so well because their growth is real and not just financial (just look at P/E ratios versus the Dotcom bubble). The rate cut will help keep the engine going.