Picture This!

I follow Liz Ann Sonders on Twitter (@LizAnnSonders). Liz loves pictures! Namely, she loves graphs and knows a picture really is worth a 1000 words. Lately, Liz has been posting pictures of the yield curve.

What is this thing we call "the yield curve," and why do we pay it such homage? The yield curve is a graph of a bond's interest rate (yield) and its time to maturity. Normally, you would expect yields on short-term bonds to be lower than yields on long-term bonds, right? After all, there is more risk in holding a long-term bond, so investors should expect a little something extra for their trouble.

But sometimes that curve gets a little whacky, and that's when investors take note. When the yield curve changes from its normal upward slope to something more akin to a flat line, that often signals trouble ahead. Liz shares her thoughts on the yield curve in her blog. She looks at the history and the current economic indicators that are shaping this curve.

A flat curve means investors are expecting rates to be lower in the future. So what? Well, lower future rates usually accompany recessions or economic slowdowns. On Friday, the yield curve went beyond flat to an inversion. That's when shorter-term bonds are yielding MORE than longer-term bonds. Yield curve inversions are like flashing red lights at the railroad crossing. So investors pulled back and got off the tracks resulting in a 2% decline in markets.

Will the trend continue? We don't know. Economies around the globe are slowing, but the US is still holding up. But there are some worrying signs. Just today, we see that housing starts dropped 9% in February and housing price gains are slowing. Our long bull run is still rewarding investors, but it's starting to experience fits and starts.

So keep your eye on that yield curve. Flat lines may nudge investors, but inversions cause us to sit up and pay attention. While not every inversion signals an upcoming recession, every recession has been preceded by an inversion. If you want to have a little fun, check out the dynamic yield curve. This shows the changing curve alongside the stock market.

Annual CFA Forecast Dinner

The annual CFA Forecast Dinner is always a stellar event. Great food. Wonderful dinner companions. And a panel of financial experts ready to expound on the topics of the day. The CFA Society of Mississippi serves as host for the event that is held at the Jackson Country Club, which is a chance for us to fete our clients while also spending time at the feet of experts who love talking finance and economics.

Selena Swartzfager, Executive Director of the MississippiCouncil on Economic Education, served as moderator. She took the opportunity to explain the mission of her organization—financial literacy for Mississippi students. The marriage of this group to our society seems a natural.

We had four outside panelists:  1) Andrew Patterson, senior economist at Vanguard, 2) Alex Dryden, global market strategist at J.P. Morgan, 3) Chad McKeithen, managing director or Fixed Income Strategies and Research, and 4) Dr. Ormala Krishnan, head of international and emerging markets for Mondrian Investment Partners.

What did we learn?

While US markets are still healthy, the challenge this year is in emerging markets. The slowdown in China, along with the trade tensions, will be a drag on international markets. This may bleed into our markets, as well.

All agreed that Federal Reserve Chair, Jerome Powell, had done a good job in his first year. Investors were spooked by some of the aggressive comments out of the Fed, but Powell backtracked and indicated moves would be gradual. The Fed will continue to unwind its balance sheet, but they are doing so in a strong market. Dryden likened it to removing the training wheels off a bicycle. You only do it when you think your kid CAN ride on his own, but you expect some wobbling when the supports are removed. So it will be with our markets. Expect volatility.

Dryden (the Brit) was the hands-on favorite for the evening. He was quite entertaining. He pooh-poohed the trade war. What trade war? He called it more of a skirmish. I’m not sure I agree with this assessment, especially since investors appear to be keeping an eye on negotiations. Of course, everything sounds better with a British accent!

What were their forecasts?

Most think the S&P 500 has gained all the ground it can already, with expectations of minor additional gains or a remaining flat market for the year. One panelist even expects the S&P 500 to be less at the end of the year. And most think increases in the yield of the 10 year Treasury will be modest, at 3% or less.

I hope you’ll be able to join us next year, when we put these prognostications to the test!