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The Northern Star 12/13/18 Volatility Continues

Message from Jon

Market Update:

The markets began last week with the promise of a positive show given the "trade war truce" that unfolded between the US and China over the previous weekend. They quickly changed their mind since the truce was only verbal and not in writing, leading one to believe that this too was only temporary in nature and not a lasting fix.5

Couple this major event cycle with the whole Brexit/No-Brexit deal that has since turned out to be a No Deal, and we have quite the exciting (not for the better) set of circumstances that gave the markets plenty of reason for pause and concerns.6

There are plenty of economists on both sides of the recession's looming debate at present, but over the weekend's reading, I came across a couple neat little charts that surmised the recession concerns quite nicely. They show why, at this point, the concerns over a recession should not be present, and therefore, what is left is that we are embracing yet another market correction!

Many are concerned about a recession because of the inverted yield curve that is a predictor of a recession. An inverted Yield Curve happens when the short-term bonds out-perform longer term bonds. This occurrence is used as a predictor of recessions and has a 100% rate of doing so-but here is where the fine print comes in. It is only 100% accurate when considering the 2-yr and 10-yr Treasury Yields. This past Monday the 3rd, the yield curve was inverted when considering the 2, 3, & 5-yr Treasuries but not the 10 yr. Now, this is not necessarily good, but it is ALSO NOT a bad omen out of hand either since, like anything these days, it can slow, reverse, or continue, and at this point, we will have to wait and see.3

As of Friday last week though, the markets once again entered into negative territory for the year, making it the 2nd time such outcomes have occurred. This means nothing except to inform those of you that still think the markets are at their highs and all is well in the kingdom.

We will continue to look for opportunities to buy down and keep our eye to the horizon for anything more hazardous that requires our attentions.


  • Stormguard: -1.54% up from the low of -1.85% in Oct.
  • D/W: Dom Eq, Int'l Eq, Comm, Fixed Income, Cash, Currency

So, like it or not, we are still seeing indications that being cautious is good, but remaining invested is the main course even after the weeks of chaos and volatility we have seen!

Till we speak again, enjoy the week!



  1. http://www.sumgrowth.com/img/Recession-Dashboard.png 
  2.  https://lpl-research.com/hoc/recession-watch.html
  3.  https://www.thestreet.com/personal-finance/education/what-is-inverted-yield-curve-14803582
  4.  https://www.clevelandfed.org/our-research/indicators-and-data/yield-curve-and-gdp-growth.aspx
  5.  https://ca.reuters.com/article/topNews/idCAKCN1O031C-OCATP
  6.  https://www.bloomberg.com/news/articles/2018-12-10/may-said-to-delay-key-vote-on-brexit-deal-to-avoid-huge-defeat
  7. http://alphadroid.com/InfoPages/Market-Sentiment2.aspx
  8. https://oxlive.dorseywright.com/dashboard/8934

Volatility Continues


Markets went for another wild ride last week, as major domestic indexes swung back and forth. By Friday, December 7, markets had posted their worst weekly performance since March - and the S&P 500 and Dow both moved into negative territory for 2018.[1]

Overall, the S&P 500 lost 4.60%, the Dow declined 4.50%, and the NASDAQ dropped 4.92%.[2] International stocks in the MSCI EAFE also struggled, posting a 2.27% weekly loss.[3]

Let's take a look at what is driving this challenging market performance.

Examining Recent Volatility

1. How volatile are stocks right now?
If recent market fluctuations have felt intense to you, there's a reason: They are. The past three weeks have had the most volatility since 2008's financial crisis. During this time, domestic indexes have ricocheted between gains and losses. The large swings have occurred both week-to-week and within daily trading.[4]  

2. What is causing the volatility?
Many of the same themes we've discussed throughout 2018 are continuing to affect market behavior. Ultimately, many investors are worried that corporate profits and global growth will suffer if trade tension persists and the Federal Reserve continues raising interest rates.[5]  

Concerns about Treasury yields were also on investors' minds. For part of last week, 3-year Treasury notes had higher yields than 5-year notes. Called an inversion, a higher yield on shorter-term Treasuries can be a sign of a coming recession. The yield spread between 2-year and 10-year Treasury notes, which people focus on more, has not inverted.[6]

3. Should you feel concerned?
With many headlines to digest, from conspiracy charges against a Chinese tech leader to comments from the Fed, investors had a lot to consider last week.[7] The difference is how they reacted to this information. For some time, markets were basically ignoring headlines. Now, they've moved in the opposite direction into what one investment manager called "a period of hypersensitivity."[8]

Consequently, recent market performance may seem unnerving. As is often the case, however, the reality may be less extreme than what appears at first glance, especially when you look at the fundamentals.

4. What do the fundamentals tell us?
While last week's market performance saw large fluctuations, the fundamentals we received were far less dramatic. We learned that two sectors beat expectations in November: manufacturing and service.[9] Further, the November labor report revealed fewer new jobs than anticipated, but unemployment is still at historically low levels, as job and wage growth continue.[10]

Remember, risks exist in the markets and economy, and we're analyzing these details closely. If you have any questions about your financial standing or anything you hear in the news, we are here to talk.

ECONOMIC CALENDARMonday: JOLTSTuesday: PPI-FDWednesday: CPIThursday: Jobless ClaimsFriday: Retail Sales, Industrial Production

Notes: All index returns (except S&P 500) exclude reinvested dividends, and the 5-year and 10-year returns are annualized. The total returns for the S&P 500 assume reinvestment of dividends on the last day of the month. This may account for differences between the index returns published on Morningstar.com and the index returns published elsewhere. International performance is represented by the MSCI EAFE Index. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

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