Published On: August 15, 2019
Written by: Ben Atwater and Matt Malick
Here at Atwater Malick, we’ve been dealing with the threat of bears on multiple fronts.
Over the past few days, local news reported sightings of a 200-pound black bear in Lancaster, PA. On Columbia Avenue, not far from our office, the bear was lounging high in a tree last evening, only to climb down and escape the police and PA Game Commission around 3am. Fortunately, authorities safely tranquilized and captured the elusive animal later this morning.
In financial markets, investors are increasingly worrying about a bear of the stock market variety.
Bond investors caused an “inversion” in the US Treasury yield curve yesterday as the yield on the 10-year Treasury fell below the 2-year yield. UK government bonds experienced a similar inversion. Consequently, equities plummeted with the Standard & Poor’s 500 giving up 2.93% yesterday.
Typically, with a normal yield curve, short-term bonds carry lower yields than long-term bonds. In other words, bond investors get paid more interest for lending their money longer. Inverted yield curves, where bond investors get paid less to tie-up their money longer, have been a somewhat rare occurrence. Importantly, they have also preceded most recessions (highlighted in gray).
As you might guess, equity bear markets, defined as a drop of 20% or more, have roughly coincided with most recessions. But this relationship has been much less reliable than one would expect. For instance, the short-lived recessions in 1980 and 1990-91 never witnessed a bear market and a bear market arrived in 1987 without an accompanying recession.
Because we can’t predict the timing of recessions or bear markets with any certainty, it pays to simply stay invested and stick with a well-defined process.
Over the last decade, we’ve enjoyed a historic bull market for stocks. But along the way, we’ve been disciplined about setting an appropriate target asset allocation for each client and rebalancing periodically. This means that we’ve sold large amounts of stock across client portfolios as the market climbed higher. This served to “lock-in” equity market gains and better prepare clients for the next bear, whenever it comes lumbering along.