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Stocks Down Modestly For The Week, But Stage Impressive Rebound Off Their Lows
What a week. After being down roughly -3% earlier in the week, stocks staged an impressive comeback to close well off their lows by week's end.
Trade and tariffs continue to weigh on the market. But the announced 3½-month delay to more than half of the $300 billion in additional tariffs until December 15th, helped de-escalate tensions a bit.
President Trump is expected to have another telephone call with President Xi in the next week or two. And Chinese officials will be traveling to Washington for another round of face-to-face trade talks.
While nobody is expecting a deal to come out of the September talks, there is hope that progress can be made.
The yield curve inversion was the other thing that roiled the markets last week.
The 10-year Treasury yield briefly dipped below the 2-year Treasury yield. And the market and the media lost their minds. (Not us.)
The hysteria surrounding it defied logic. Everybody was screaming recession. And the breathless 'reporting' on it was both comical and nauseating.
It was as if everyone forgot that the economy often expands after an inversion. And that the stock market typically goes up afterwards on average of 16%.
But the reason for this inversion seems much different than past inversions.
Fortunately, the adults chimed in shortly thereafter to calm everybody's fears.
Most notable was former Fed Chair Janet Yellen when she dismissed the recent yield curve inversion by insisting the markets should place less weight on it and urging folks that "on this occasion it may be a less good signal."
She continued by saying, "the reason for that is there are a number of factors other than market expectations about the future path of interest rates that are pushing down long-term yields."
And she added that the U.S. is not likely to head into a recession saying, "I think the U.S. economy has enough strength to avoid that..."
She's right.
Our full year GDP is on pace for 2.6%, which is stronger than the average annual GDP of this entire 10½ year expansion. Unemployment is near record lows. Consumer confidence is near record highs. And corporate earnings continue to impress.
The biggest reason why the yield curve inverted is because there's an enormous demand for our Treasuries. And it's easy to see why. With the slower growth rates around the globe, and the pervasiveness of near zero yields and negative yields in bonds of other countries, where else are bond investors going to put their money?
Think about it -- if you have hundreds of millions of dollars or billions of dollars, capital preservation is priority number one (and the virtual risk-free guarantee of the U.S. Treasury satisfies that), and then a positive yield is priority number two. And that makes U.S. Treasuries the best game in town.
When the Fed cuts rates again, that will push short-term yields down further, where they belong, and correct the inversion. And not so incidentally, it will stimulate more economic activity and likely send the market higher.
The Fed meets again on September 17th and 18th where they are expected to cut rates again for the second time this year. The odds are currently at 74% that we'll another cut, with more and more people speculating that it could be 50 basis points this time.
I would not be surprised to see some additional volatility as we approach the action-packed month of September.
But I'd buy the dips.
Because the catalysts in place look far more bullish than not. Even if there's nothing to celebrate on the trade front, the all but certain rate cuts should ultimately send stocks to new highs.
See you tomorrow,
Kevin Matras
Executive Vice President, Zacks Investment Research
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