As markets transitioned into spring off their historic winter bounce, evidence of global slowing began to accumulate. Factory gauges flagged, jobs reports became erratic, trade disputes flared, the US treasury yield curve inverted, and the World Bank cut its forecast for global growth by -0.3% to +2.6% (World Bank, “Global Growth to Weaken to 2.6% in 2019, Substantial Risks Seen,” 6/4/19). In May, the S&P 500 fell some -6.4% (‘SPY’ proxy ETP*).

However, just as quickly, markets recovered in June and now again sit at record highs. Why the about-face? First, threatened US-Mexico tariffs were quickly resolved. Previously announced US-China tariff increases were then postponed for further negotiation. And finally, the US Federal Reserve recognized various threats to global growth within a low inflation environment, and committed to cutting rates, accordingly (Fox, “The Fed is poised to cut interest rates…,” 7/12/19).

Year-to-date, this left US stock index growth in the high double digits, with overseas issues lagging on greater uncertainty and US Dollar strength. Ironically, bond prices also posted strong gains as inflation expectations diminished and odds for a rate cut increased. Indeed, twenty-year treasuries rose some +10.5% (‘TLT’) through June.

Here lies the irony of the simultaneous moves – both are in reaction to an assumption of lower growth ahead. However, unlike bonds, if the slowdown continues despite global bank efforts, stocks could act poorly in the future. One way of interpreting the inverted yield curve, is that current market risks are deemed higher now than in the future. Extended inversions have predicted every recession back to the late 1960s (Bankrate, “What an inverted Treasury yield curve means…,” 5/29/19).

There are reasons to think this may not be the case this time. First, no single indicator is perfect forever. Second, with many foreign treasuries yielding negative returns, there has been unusual demand for US treasuries, distorting curve dynamics. Finally, stock volatility remains low and any number of trade/ Brexit resolutions could further delay an eventual recession.

That said, we expect there will be especial pressure on quarterly earnings kicking off next week. Going in, expectations are for a marginally positive result of +1.0% growth (Factset, “S&P will likely report growth…,” 7/12/19). However, any downside deviation may result in a new wave of volatility. Meanwhile, we are advancing research in how to more proactively adjust portfolios to manage volatility events before they occur in this directionally choppy environment.

* Not Individual Investment Advice; Dividend-adjusted proxy ETP data from Commodity Systems, Inc. & Allocations as of June 30, 2019; ECA assumes no duty to update any information in this presentation for subsequent changes of any kind.