Roller Coaster Stocks

After a strong first quarter, global stock markets gave us increased volatility during the second quarter before finishing the quarter with solid gains. Stocks were strong in April, suffered a large sell off in May, and rebounded once again in June. Bonds were much more stable, following up a good first quarter with more gains during the second quarter. Mixed economic data and heightened trade fears left investors unsure of where the economy is headed, which increased volatility.

We talked in our last letter about the yield curve inverting briefly during the first quarter and the possible implications of this. The yield curve inverted again in late May and remains inverted to this day. This happens when yields on short term bonds are higher that they are on longer term bonds. This rarely happens and is often the signal that an economic recession is looming. In fact, the last seven recessions in the U.S. have been preceded by an inverted yield curve. It is worth noting that the bond market is much better at predicting the economic future than the stock market is. There is an old adage on Wall Street that is worth remembering: Never ignore an inverted yield curve.

Read More