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Market Perspectives

Plante Moran Financial Advisors’ Investment Research team provides timely financial expertise on ongoing market developments and trends, while addressing questions that are top of mind for investors today.

  • Does the flattening yield curve signal a recession? 

    The Federal Reserve has continued to lift short-term rates gradually since December 2015, while long-term rates have edged higher, but more slowly. Historically, when short-term rates have exceeded long-term rates (creating an inverted yield curve), a recession and stock market correction have generally followed within the following year.

    Although the yield curve has flattened considerably, the “term spread” (the difference between the 2-year and 10-year Treasury yields) remains well above zero (0.6%). As was the case in the 1990s, the yield curve could remain relatively flat for several years without inverting.

    An inversion in the yield curve has typically presaged a recession and stock market decline on the horizon. In the absence of that, we don’t believe that the flattening of the yield curve as the Fed raises rates should create concerns about a recession in the near term or is a cause for alarm.

    Yield curve not inverted chart

  • What could the flattening yield curve mean for stocks?

    The rise in the 10-year Treasury yield to 3% and a simultaneous flattening of the yield curve have been cited as potential catalysts for market volatility in recent months. While spreads have narrowed, it is an outright inversion of the yield curve that has previously been a stronger indicator of a future downturn in equity markets caused by a recession.

    Historically, stocks have actually performed well on average when the yield curve is relatively flat. Since 1976, stocks have generated strong returns during the 12- to 24-month period following a month when the term spread (the 10-year Treasury yield minus the 2-year Treasury yield) was between 0% and 0.99%. Interestingly, when the yield curve inverted, equity performance varied dramatically, but was still positive on average.

    Although prior yield curve inversions were typically followed by a period of higher volatility and economic weakness, equity investors who stayed invested through the downturn still typically achieved positive returns.Equity performance chart

  • Does recent volatility signal more trouble ahead?

    While the CBOE Volatility Index (or VIX) illustrated below clearly shows that equity volatility spiked earlier this year, high yield credit spreads held relatively steady and remain tight in a historical context. The fact that they did not widen to any meaningful degree even as equity volatility spiked is noteworthy.

    Although corporate sector borrowing has increased in recent years, investors do not appear to be concerned with corporate profitability or default risk to a meaningful degree. Against the backdrop of a still positive economic outlook, tight credit spreads and positive credit market conditions provide further evidence that the recent equity pullback was more likely a correction than it was a sign of concern about a deterioration in economic fundamentals, declining credit market conditions, or the start of a prolonged bear market.

    Plante Moran Market Perspective spreads remain
  • Why should investors hold bonds?

    For many investors, high-quality bonds are an important part of a diversified portfolio, acting as a dependable source of income. Further, that diversification is illustrated by their historically negative correlation with equities (-0.2 since 1997), making them particularly valuable during periods of equity market volatility. When an equity correction or bear market occurs, interest rates typically fall, boosting bond values and reducing overall portfolio volatility when investors need that extra protection the most.

    While bond investors might find the recent uptick in rates and modestly negative returns unsettling, the fundamental benefits of owning bonds haven’t changed. They continue to provide an important source of income for investors, and should act as a strong counterbalance to equity risk in a diversified portfolio.

    Plante Moran Market Perspectives bonds corolation
  • April equity performance 

    After two consecutive months of broadly negative returns, equity markets were mixed in April. Within domestic equities, small-cap names outperformed large caps, returning 0.86% over the month, while mid caps declined modestly. International developed equities posted the strongest performance, rising 2.3%, although emerging market equities slipped by 0.44%.

    Talks of trade disputes and tariffs, higher interest rates, and elevated valuations have been keeping a lid on the market even as the overall economic and corporate earnings picture remains strong.

    Equity performance chart
  • April fixed income performance 

    Fixed income was broadly lower over the month, as both short-term and long-term yields rose slightly over the period. Inflation expectations moved higher, pushing up long-term yields. In addition, investors started to shift back into risky assets during the month, reducing demand for longer-term treasuries. High-yield bonds posted a positive return in April, as high-yield spreads narrowed slightly.

    On a year-to-date basis, bonds remain in negative territory. However, while rising rates have weighed on performance in the short-term, longer-term returns should benefit from the increased yield on fixed income securities.

    Fixed income performance chart
  • Economic Perspectives

    Plante Moran Financial Advisors’ Investment Research team provides a quarterly review of myriad, complex factors which help shape the economy and influence the markets.

    View our Economic Perspectives

  • Disclosures 

    Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. You should consult a representative from PMFA for investment advice regarding your own situation. The information provided in this update is based on information believed to be reliable at the time it was issued. Any analysis non-factual in nature constitutes only current opinions, which are subject to change.