GSB Wealth Management Quarterly Newsletter 6/30/2018
Our last newsletter started with “Happy Spring” coming out of March after four consecutive Nor’easters and trees and limbs down everywhere. I was debating whether to start this newsletter with “Happy Summer” but decline to do so after being caught in the May 15 tornado and now suffering 8 consecutive days of insufferable heat where I don’t even want to stick my toe outside. I was sitting at home yesterday on July 4th and heard on the news that the President tweeted that OPEC should immediately reduce oil prices by 10%. He must be smarter than I am because I don’t know how to tweet, nor care to look like a bird brain trying to figure it out. I had my daughter try to explain it to me and I suddenly started to feel bold, technologically speaking. I decided I was completely capable of posting a selfie of my Snapchat while at the same time tweeting and slinging it to Hulu via my Netflix account. Let’s see the President do that! Seriously speaking, I find it curious that we expect to make progress by tweeting threats, whether it be to reduce oil prices by 10% or flogging Harley Davidson because they want to move production overseas. All due to the tariffs that were recently imposed making Harley’s cost of production prohibitive here in the states. We spoke to this in our last quarterly letter. Tariffs do nothing but create spats. Tit for tat. You tax my steel and I’ll tax your bourbon. Manufacturing usually migrates to the lowest cost producer. First it was Japan in the 70’s followed by Thailand, then Cambodia, then Korea, and now China. Trying to stop such progression sounds good on paper but is difficult in reality.
Remarkably, the stock market is taking all of this in stride, essentially being about where it started the year despite all of the day to day volatility. Last year was terrific for stocks so taking a breather for a period of time is actually quite healthy. The Dow Jones Industrial average has almost quadrupled from its March 2009 low of 6,600, making this one of the most powerful advances in history. From a duration standpoint this bull market is running at almost nine and a half years, making for one of the longest advances in history. We spoke in an earlier newsletter to dichotomies in the current economy, from booming RV sales in Elkhart Indiana where assembly lines workers are make over $90,000 per year to other areas in the country where people are struggling just to pay energy and food bills. Another potential speed bump we are watching closely is what is referred to as the “yield curve”. We have alluded to the yield curve in past investment letters, but it is worth revisiting again. Simply put, the yield curve is the difference between long term interest rates (defined as the 10-year US Treasury note currently yielding 2.8%) and short-term interest rates (the 2-year Treasury note yielding 2.6%). When the economy is healthy and growing soundly the yield curve tends to be fairly steep with the 2-year Treasury note at, say 3% and the 10 year at 6%. When recession is in the offing the yield curve tends to “invert”, where the 2-year Treasury note actually pays more interest than the 10-year note. In the past year or so the yield curve has been flattening to where the current difference in yield between the 2-year Treasury note and the 10 year is only .20%. What this is telling us is that the Federal Reserve feels the economy is strong and may need to be cooled with further short-term interest rate increases. Conversely, the Fed has little control over long term interest rates. Long term rates are set by the “market” – investors, economists and market participants. They are telling us a different story, that the economy is likely to be weaker than people expect in the months ahead.
GSB Wealth is watching this situation carefully. Should the yield curve “invert” then an economic slowdown, if not outright recession, is likely to follow. Our disciplined investing and bias toward high quality bonds and stocks will carry us through any potential rocky periods as it has in the past. The economy is currently firm and corporate earnings have been coming in strong. We hope this continues, but if it doesn’t please be assured that your GSB Wealth Management team has a firm hand on the tiller.
As always, please contact us with any questions and/or concerns.
Your GSB Wealth Management team.