Wednesday morning the two-year to ten-year treasury yield curve inverted for the first time since 2007. An inverted yield curve occurs when short-term interest rates rise to a level higher than longer-term ones. In this case, the two-year treasury yield is a few basis points (a basis point is 1/100th of one percent) higher than the ten-year yield. Taking heed, major stock markets around the world were down over two percent on top of the increased volatility of the past few days.
Historically, recessions have occurred, on average, 22 months following a two-ten inversion. Counterintuitively, the S&P 500 has averaged a 12 percent positive return one year after a two to ten inversion, and it’s not until about 18 months after an inversion that the stock market starts to see bear market-like declines.
Why has the yield curve inverted and what does it mean? We’ve written before about the potential negative effects of the trade dispute between the U.S. and China and several seem to be playing out. Growth in the U.S. has slowed as has economic activity in many other parts of the globe. Germany and France saw their economies contract last quarter and growth in China, although the numbers can be unreliable, is undoubtedly slowing too.
Given the increasing interdependence of the global economic system, it is only natural that slowing growth among the world’s largest economies puts pressure on others. In this slow growth/contracting economic environment, central banks and large institutional investors prefer to own bonds because of their relative price stability compared to stocks. That in turn increases the price of bonds, lowering bond yields (aka interest rates) since bond prices and yields move in opposite directions. When long-term interest rates decline below short-term rates (inverts) the bond market is essentially forecasting a recession.
An inverted yield curve has practical implications for the business cycle as well. In a normal economic environment banks “lend long and borrow short,” lending at higher rates and borrowing the money to fund those loans at lower rates. The difference between the two rates—the spread—is the bank’s profit margin. The lower the spread is, the pickier banks become about who and what they will finance, making companies and individuals more likely to delay or cancel capital spending and other purchases. When that slowdown reaches the point that the economy contracts a recession occurs.
No one knows if this inversion will ultimately lead us into recession or when the next bear market will begin. Since 2017, we have been helping clients focus on whether, given the strong equity returns since 2009, they remain comfortable with their allocation between stocks and bonds. Even after the volatile last few days, major U.S. markets are within six percent of their all-time highs. As such we remain confident this is a prudent time to continue focusing on asset allocation and ensuring clients are comfortable with theirs. Maintaining that comfort level helps all of us weather inevitable market declines by focusing on long-term goals and avoiding emotional, undesirable decisions.
Thank you as always for your confidence and trust! The Glenview Trust Company
Peggy Krug of Louisville, Ky., received the Alumna of the Year Award to honor the exceptional amount of time she has spent advancing WKU in her home community. A 1978 alumna and Lifetime Member of the WKU Alumni Association, Krug has served as Treasurer of the Greater Louisville Alumni Chapter and a member of the WKU Alumni Association Board of Directors, where she has chaired the Alumni Achievement Task Force and overseen the Hall of Distinguished Alumni selection process.
As bad as the fourth quarter of 2018 was for the stock market, the first quarter of 2019 was almost as good. Since the five percent washout on Christmas Eve, the S&P 500 has risen 25 percent and, as of this writing (5-22-19), major U.S. market indexes are within a few percentage points of their all-time highs. In our 2018 review/2019 preview, we mentioned three factors that were weighing on the economy and markets: rising interest rates, slowing global growth and U.S. trade skirmishes with several countries. Some progress has been made, but many questions, as always, remain.
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THEN AND NOW Sherry Feldpausch fondly remembers when she first discovered KET. She was a young girl at Stanley Elementary in Owensboro. Her teacher, taking a break from the day’s regular activities, wheeled a television into the classroom, tuning it to KET. Sherry and her classmates delighted in what they saw: fun, educational programs that explored science and math and opened their eyes to the wonders of Kentucky and the world around them. “It was such a treat when we got to watch KET,” Sherry recalled. “It was the best part of the school day.” Today, she says she still gets the same joy when she tunes in to KET. “If you want to know and hear about Kentucky—and to really know what’s going on in your state—there’s no better way to find out about it than from KET,” said Sherry, a trust administrator with The Glenview Trust Company in Louisville. “There’s so much great programming that we love to watch.” The daughter of Western Kentucky farmers, Sherry said her family’s keen interest in public service rubbed off on her at a young age. So it’s fitting that Sherry says she’s drawn to KET’s public affairs programming, particularly Renee Shaw’s legislative and election coverage through programs such as Kentucky Tonight and Legislative Update. “Renee gives you the local perspective for Kentucky,” Sherry says. “And she does such a great job, giving you both parties’ perspectives in a straightforward way—it’s not vitriolic at all.” When Sunday comes around, she again looks forward to KET, where she can catch up on her favorite Masterpiece programs, such as Victoria and Poldark. Her parents and sister Peggy are likewise fans of the programs—and they’ve made a tradition of grabbing their phones and exchanging texts while they watch the dramas unfold, commenting on the various plot twists. “We love good stories—and the Masterpiece programs are all so well done,” Sherry says. “The costuming is terrific. The dialogue is great. And the characters just draw you in.” In the past, if she missed a Masterpiece program, she would simply wait until it aired again later in the week. But not anymore, thanks to KET Passport. With this member benefit that gives supporters expanded online access to thousands of PBS programs, she can watch programs she missed on her own schedule. “It’s been so liberating to have KET Passport,” Sherry adds. “It’s changed the way we watch, and it’s allowed us to revisit the shows we love, such as Downton Abbey.” Sherry said her passion for KET ultimately prompted her to take a larger role with the statewide public television station. Nearly a decade ago, she began serving on KET’s Greater Louisville Regional Fund Board, eventually becoming the board’s chair for three years and spearheading numerous fundraising events for the station, including the annual Spirits, Sparkles and Spurs event. “I think it’s important to find things that are interesting to you and worthy of your time,” Sherry says. “I enjoy KET and knew that funding was crucial and necessary. So being a part of that and helping out in any way I could was important to me.”
COMMITTEE OF THE YEAR INVESTMENT COMMITTEE Walter C. Koczot, Chair
The Investment Committee, chaired by Walter C. Koczot of the Glenview Trust Company, is responsible for overseeing the LBA’s investment account within guidelines established by the Board of Directors. Because of the committee’s diligence, the LBA has solid financial reserves.
Louisville Bar Briefs www.loubar.org
Members on The move
The University of Louisville Law Alumni Council presented Tawana Edwards, co-CEO and chief fiduciary officer at The Glenview Trust Company, the Lawrence Grauman Award. The award honors a lifetime record of leadership and service to the
profession and community. Edwards received her J.D. at the University of Louisville Brandeis School of Law and was honored as an Outstanding Law Alumnae in 1999. Edwards has more than 35 years of experience and expertise in all aspects of fiduciary law, including personal trusts, estate planning and trust and estate administration. Today, she is the co-chief executive officer, chief fiduciary officer and a member of the board of directors of The Glenview Trust Company. She is secretary of the corporation and has served as such since its inception in 2001.
Louisville Bar Briefs www.loubar.org
This year, the busy elves at The Glenview Trust Company partnered with the caring staff of ElderServe to spread holiday cheer to more than 40 seniors in our community. Our staff joined together to shop, wrap gifts, and lift the spirits of seniors in our community that may not have family or friends to support them during the holidays. We sincerely enjoy the opportunity to give back to our community.
Recent Market Volatility
In the last ten trading sessions, the S&P 500 dropped 10% from its all-time high set January 26th and volatility, largely absent the past two years, returned with a vengeance. While we knew a correction was long overdue—the last one was in January of 2016—the violent nature of this turn was stunning. Many investors had been lulled into complacency after 13 consecutive months of positive returns, the longest streak in history.
Although many theories abound, we think the selloff resulted from the market properly reassessing the risk of inflation, given the strong employment and wage growth reports last week, and the implications of higher inflation for interest rates and Fed policy going forward.
Identity Theft has been an important topic in the news and in our many conversations with our clients and we want to help you feel empowered to act should this happen to you.
The following link, “Coping with Identity Theft”, outlines the steps you need to take in the event you or your family falls victim to identity theft.
Your Glenview team works extremely hard to protect your sensitive information, including all information held in electronic formats. We also work to stay current on this important subject and will continue to share our findings and best practices for protection against this crime.
As our Client Service Team works with you throughout the year, please let us know your concerns on this topic and any others. Our number one priority is always to provide the best customer service and to act quickly when important events in your life require our assistance.
All of us at Glenview wish you a happy and prosperous 2018.
Scott was selected to be one of the 60 professionals that will be in the Leadership Louisville Class of 2018. His incredible journey is about to begin! The Leadership Class is a diverse group that will spend the next 10 months meeting decision makers and examining the issues that matter most to Louisville. The biggest advantage comes in the form of developing lifelong friendships and social resources, as they increase their influence to change and innovate the way we do business in Louisville.