Things are starting to get interesting as the S&P 500 had the biggest sell off of the year on 8/14, dropping nearly 3% in one day. The yield curve has fallen tremendously since the beginning of the year and the 10 year yield has fallen below the 2 year near 1.60%. The 30 year yield has fallen below 2%, settling at 1.96% which is the lowest yield ever recorded on the 30 year. Interest rates across the curve are below the Federal Funds Effective Rate of 2.25% to 2.5% and signalling to the Federal Reserve additional cuts of up to 75 basis points may be needed by the end of the year.
The equity markets made a rapid adjustment, as risky sectors such as tech were sold hard. Economic data out of China and Germany signaled slowing manufacturing data and declining exports. The world economy is on loose footing and with a reliable recession indicator flashing, investors have locked in gains from all time highs reached on the S&P 500 when it surpassed 3000.
Central banks around the world continue to cut and look for stimulative measures to keep their respective countries from falling into recession. The USA remains the strongest economy, unemployment is at all time lows and GDP is still trending positive near 2%. The biggest danger to US growth remains President Trump’s trade war with China and the possibility for additional tariffs on $300 billion of goods. Trump gave certain electronic goods a reprieve from 10% tariffs expected to go into effect on September 1st such as Phones and other electronics. Trump had a strong hand and only needed to hold out longer than Chinese President Xi; however, with backing off by removing tariffs on certain electronic goods China is beginning to realize that they only need to last an election cycle or two to gain the advantage in the trade war.