Ironwood Market Update – August 19 2019

Dear clients and friends,

The yield curve for corporate bonds has become almost completely flat. What this means is that a 5 year bond is yielding (paying) almost exactly what a 1 year bond is yielding. Normally, you would earn more interest for longer bonds than for shorter ones. Right now, this is not the case, at least on the bonds that we are using. This has happened because the longer bonds have gone up in price, driving the yield lower which is of course a good thing.

We will be selling these longer bonds and moving to shorter bonds. Ideally the yield curve will regain its normal shape or interest rates will go up, at which point we will buy those longer bonds back at a lower price and a higher yield. Since they are currently all earning the same amount, we won’t be giving up potential interest while we wait for this to happen. If interest rates fall farther, then we could miss out on some potential interest, but in our opinion that risk is low.

In the high yield portion of our portfolios, we will be likewise shortening our bond ladders both for this reason, as well as because of potential price risk if recession fears increase.

Overall this is NOT a big move, but we believe it will be a bit safer, as well as hopefully earn a bit more on the fixed income portion of our portfolio once this weird pricing corrects.

As always, please don’t hesitate to contact us with any specific questions or concerns you may have.

Sincerely,

Alex Parrs
Investment Advisor
alex.parrs@ironwoodfinancial.com

Ironwood Market Update – August 15 2019

Dear clients and friends,

The stock market was shaken by an indicator called a yield curve inversion. What this means is that 2 year government bonds were paying a higher interest rate than 10 year bonds. This is unusual and fundamentally shouldn’t be. The theory is that there is more demand for long term bonds because of perceived short term weakness in the economy. This makes the price of the long term bonds go up, and therefore the yield go down.

The reason the market is concerned by this is that there is a high correlation between this indicator and a coming recession. This indicator does not have a 100% track record, however, and the coming recession that it has predicted in the past has taken as long as 2 years or more to come to pass. Historically, after one of these signals, the market drops about 5% and on average rallies about 17% after that, before falling due to recession. To me, that reads as if this is a bullish indicator at least in the medium term.

Another point to take into consideration is that the Fed is playing a huge role in artificially controlling interest rates. This makes any indicator based on these rates suspect.

Our plan at the moment is to wait and see how the market reacts until there’s a larger overall move. There have been some big days, but the overall move from the peak isn’t that big in terms of percentage points. If the drop continues, we intend to purchase more stocks, and keep a close eye on profits to see if a recession actually is looming. On the bond side, our bonds have gone up in value, so we will start leaning more towards the short end of our bond ladder and when interest rates climb once again, we will once again go longer.

As always, please don’t hesitate to contact us with any specific concerns or questions.

Sincerely,

Alex Parrs
Investment Advisor
alex.parrs@ironwoodfinancial.com

Ironwood Market Update – August 2019

Dear clients and friends,

The last week or so in the financial markets have been a bit concerning. The stock market has taken a downward direction once again due to the China trade thing. Recently, the US imposed further tariffs on Chinese imports as a bargaining tool in upcoming talks. These tariffs effectively would make goods from China more expensive. In retaliation, China devalued their currency, thereby making goods from China cheaper to US consumers. From an economic theory perspective, both of these moves are negative. The change in exchange rate is particularly concerning because it raises a great deal of uncertainty as to future moves by China.

From a stock market perspective, we have two concerns. The first one is of course the uncertainty of more politically motivated moves that can affect earnings, and secondly the effect of the already made moves to the profitability of companies.

In my opinion, at least with companies that are US based and derive most of their profits in this country, the first concern is by far the bigger one. After all, as far as the US is concerned, Chinese imports were made both more expensive and cheaper by these two moves. Those moves are opposite and will to some extent lessen or even cancel the overall effect. The uncertainty factor, is as usual the thing that will make the market jump or tumble in the near term. Remember back to the 4th quarter of last year. There was a pretty big drop for no real reason, based on uncertainty over interest rates and the economy. That of course was short lived, as people came to their senses once they had reviewed the real economic data and not just acted based on speculation.

As of right now, we are in “wait and see” mode. It is very likely that all this is just political posturing as it has been the last half dozen times or so over the last couple of years and will just blow over. I do not believe that either the US or China will willingly scuttle its economy over this. It is very likely in the short term that there will be more of a downturn as speculators take advantage of investors’ panic. However, in the long term the market should realize the economy is doing quite well right now.

Finally, and most importantly, “Don’t fight the Fed.” The Fed just lowered interest rates, signaling it has its eye on the economy and is ready to continue its ridiculous level of stimulus if we show signs of economic weakness. Right now, 10 year treasuries are trading below 1.75% per year. Interest rates that low create a huge amount of upward pressure on the economy and the stock market. It is too soon in my opinion to do any large buys, but if this latest political fight pulls the market down significantly, we will be ready to buy.

As always, if you have any questions or concerns, please don’t hesitate to contact us about your particular situation.