August 2019 Financial Market Volatility Update

Sam Ngooi Comments

In our most recent July 2019 Monthly Comments, we discussed the media coverage of early August stock price volatility on days when prices were lower. Key market movers were presented as 1) the direction of interest rates; 2) tariff and currency disputes with China; and 3) the inverted yield curve for ten-year and three-month US treasuries, perhaps signaling an economic recession. One additional point on the relationship between stock prices and recession not frequently discussed in the media is that stock prices do not necessarily fall in response to recession (a lengthy subject for a future Monthly Comments).

Those same July Comments pointed out the surprising upturn in stock prices since Trump’s election. The updated figure as of Friday, August 16 (using the S&P index close of 2,888) was 35%, 4% lower than end of July. That same index is still up 15% for 2019 year-to-date.

Another key point in those July Comments was to focus on percentage changes and not just absolute numbers (e.g., an 800-point drop in the Dow Industrials translates to a 3% decline). Any percentage decline is further modified by your specific portfolio allocation away from stocks, and into the less volatile, lower returning asset classes of bonds and cash equivalents.

As for bonds, they continue their recent trend of yield inversion, with the ten-year Treasury yielding 1.56% and three-month Treasury yielding 1.87% (as of the August 16 close), an unusual situation the length of which is pure guesswork.

The additional thought we would like to add in this update is to suggest that the media ‘s efforts to assign reasons for and economic significance to this recent volatility may be misplaced. Rather, this volatility may just be the effect of short-term trading among financial market participants looking for short-term gains.  This thought may be supported by the fact that there are up days for stock prices sprinkled among the down days, which might not occur if the price movements were truly economically significant. We and others have expressed this idea during other periods of volatility, but it remains one we should keep in mind as we all follow the news.