THE WEEK ON WALL STREET
Stocks remained resilient last week amid mixed earnings reports, hawkish Fed-speak, and lingering recession fears, closing out the five trading days with small losses. The Dow Jones Industrial Average slipped 0.23%, while the S&P 500 lost 0.10%. The Nasdaq Composite index fell 0.42% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, added 0.10%.
FACT OF THE WEEK
President John Adams approves legislation to appropriate $5,000 to purchase “such books as may be necessary for the use of Congress,” thus establishing the Library of Congress. The first books, ordered from London, arrived in 1801 and were stored in the U.S. Capitol, the library’s first home. The first library catalog, dated April 1802, listed 964 volumes and nine maps. Twelve years later, the British army invaded the city of Washington and burned the Capitol, including the then 3,000-volume Library of Congress.
Former president Thomas Jefferson, who advocated the expansion of the library during his two terms in office, responded to the loss by selling his personal library, the largest and finest in the country, to Congress to “recommence” the library. The purchase of Jefferson’s 6,487 volumes was approved in the next year, and a professional librarian, George Watterston, was hired to replace the House clerks in the administration of the library. In 1851, a second major fire at the library destroyed about two-thirds of its 55,000 volumes, including two-thirds of the Thomas Jefferson library. Congress responded quickly and generously to the disaster, and within a few years a majority of the lost books were replaced.
After the Civil War, the collection was greatly expanded, and by the 20th century, the Library of Congress had become the de facto national library of the United States and one of the largest in the world. Today, the collection, housed in three enormous buildings in Washington, contains more than 17 million books, as well as millions of maps, manuscripts, photographs, films, audio and video recordings, prints, drawings and digital materials
MARKET MINUTE
Stocks Hold Firm
Stocks traded most of last week around the flatline as investors grappled with several headwinds. The first was disappointing earnings results, coupled with the absence of earnings guidance from some companies due to an uncertain economic climate. Weak economic data, including declines in housing and leading economic indicators, also weighed on investor sentiment. Finally, multiple Fed officials spoke last week, signaling that inflation remained too high and that further rate hikes may be likely. Underneath the seemingly placid surface of the major market indices, there was substantial price action at the individual stock and sector level. Poor earnings results hit communication services stocks and regional banks, while margin pressures put pressure on auto stock valuations.
Housing Weakness
Two housing reports reflected ongoing fragility in the housing market and fed prevailing economic slowdown worries. Sales of new homes fell 0.8% in March, dragged down by a 5.2% slide in new multi-family home construction. Sales of single-family homes were a bright spot, rising 2.7% to a three-month high, though that hopeful note was tempered by an 8.8% drop in new application permits–an indicator of future new home building. Existing home sales also suffered a month-over-month decline in March, falling 2.4%. Sales plummeted 22% from March 2022 levels as higher mortgage rates and tight inventories impacted affordability.
FINANCIAL STRATEGY OF THE WEEK
Recently, you may have seen some headlines talking about an “inverted yield curve” and what it may mean for the economy. An inverted yield curve is just one indicator of the economy’s possible direction, so let’s put these headlines into context.
First, what is the yield curve, and what does it show? The yield curve is a graphical representation of interest rates (yields) paid out by US Treasury bonds. A normal yield curve shows increasingly higher yields for longer-dated bonds, creating an upward swing. An inverted curve has a downward slope, indicating that shorter-dated bonds yield more than longer-dated bonds, which isn’t typical.
Does an inverted yield curve mean we’re headed for a recession? Based on the historical track record of this indicator, yes, an inverted yield suggests a recession may be coming. Since 1976, a recession has followed an inverted curve every time. However, there are some important caveats to mention here:
An inverted yield curve needs to remain inverted to be considered an indicator. It’s normal for markets to fluctuate as conditions and investor sentiment ebb and flow. But, according to the experts, for an inverted curve to be a recession indicator it needs to stay inverted for a month or more, historically.
Recessions aren’t instantaneous. An inverted yield curve doesn’t mean a recession is just around the corner. Since 1976, the average time between an inverted yield curve and an official recession has been around 18 months; the longest was nearly three years. That’s plenty of time to prepare! It’s also worth mentioning that an inverted yield curve doesn’t cause a recession. The yield curve reflects bond market sentiment – it doesn’t drive it. The yield curve inverts when bond market investors feel like something may be up and, in response, favor shorter-term bonds over longer-term ones.
It’s a deceptive signal for your portfolio. An inverted yield curve does not mean it is time to sell. Historically, the market continues to advance following an inverted yield curve, gaining an average of 11.5% real return (net of inflation) since 1976. Don’t let one indicator spook you.
The takeaway here is that while an inverted yield curve may be unnerving, it’s by no means cause to panic. If anything, it’s an opportunity to assess your portfolio’s allocation against your risk tolerance, evaluate your household’s current spending, and potentially increase your emergency fund. Our team is closely monitoring economic conditions and will proactively alert you should we feel action needs to be taken. In the meantime, feel free to call us if you have any questions or concerns.