Continuing our series of articles designed to help you begin planning at home for retirement. Many people are simply unsure of all the things they must do to plan for a safe, happy retirement. And the pressures of day-to-day living make this a task that can easily be overlooked or pushed off, sometimes for years. The cycle of procrastination, stress, and more procrastination is far too common when planning for your future ‘golden years’. So we’ve put together this series of articles to gently get you started, at home, in the comfort of your kitchen or office. And when you’re ready for help, we’ll be here to gently guide and add any necessary structure to your plan. [Read more…]
On Monday, December 3, the U.S. Treasury Yield Curve inverted for the first time in over a decade. Just one day later, the Dow fell 799 points (3.1 percent), with the S&P 500 and Nasdaq also finishing down (3.2 percent and 3.8 percent respectively).1
The yield curve inversion occurred as the yield on the five-year note hit 2.83, one basis point lower than the three-year note’s yield of 2.84. (If you’re not familiar with basis points, 100 basis points equals one percent. One basis point equals .01 percent.)
What exactly is the U.S. Treasury Yield Curve and how does its inversion affect investors? The Treasury Department sells 12 types of securities: bills in durations of one, two, three and six months; Treasury notes in durations of one, two, three, five and 10 years; and 30-year bonds. A yield is the return an investor realizes from a fixed-income security, which includes the 12 securities offered by the U.S. Treasury.
In a growing economy, the longer the maturity of the security, the higher its yield. This is due to its duration risk; the longer the security is held, the more sensitive it is to interest rate changes. A yield curve shows the spread between yields for each type of security. The yield curve is normally an up-sloped shape, somewhat like a capital U.
When shorter-term security yields surpass long-term security yields, the yield curve turns upside down. The inversion is caused by predicted interest rates; if interest rates are forecasted to be lower in the future, investors purchase more long-term bonds in order to lock in their higher rates now. In response to the increase in demand, the price for long-term securities goes up and yield goes down. The opposite is true for short-term securities, where yields are being pushed up due to decreased demand. The curve changes shape as the relationship between short-term and long-term yields changes.2
An inverted – or negative, as it’s sometimes called – yield curve is often a predictor of a lurking recession; the yield curve has inverted ahead of the past seven recessions. However, while the inversion often accurately predicts a turning point, a recession doesn’t always follow immediately on its heels. For example, the yield curve inverted in March 2006, and the first pangs of the following recession weren’t felt until December 2007.3
Even though there is frequently a gap between an inversion and a recession, some analysts are tying Tuesday’s market drop to investors who are nervous about the inverted yield curve.4 Although we can’t say for sure if this is a turning point in the current business cycle, the inverted yield curve tells us that investors aren’t optimistic about the economy in the near future.
1 Matt Egan. CNN Business. Dec. 4, 2018. “Dow plunges 799 points on trade, slowdown fears.” https://www.cnn.com/2018/12/04/investing/stock-market-today-dow-jones/index.html. Accessed Dec. 5, 2018.
2 Investopedia. “Inverted Yield Curve.” https://www.investopedia.com/terms/i/invertedyieldcurve.asp. Accessed Dec. 5, 2018.
3 The National Bureau of Economic Research. “US Business Cycle Expansions and Contractions.” https://www.nber.org/cycles.html. Accessed Dec. 5, 2018.
4 Kevin Kelleher. Fortune. Dec. 4, 2018. “An Inverted Yield Curve, a Predictor of Recessions, Has the Stock Market Spooked. http://fortune.com/2018/12/04/stock-market-inverted-yield-curve-are-we-in-a-recession/. Accessed Dec. 5, 2018.
This content is provided for informational purposes only. The third-party information and opinions contained herein, have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by AE Wealth Management.
Once again, Safe Harbor Financial Services and our clients are helping to bring Christmas cheer to the many people in our area with special needs– the elderly, children separated from their parents and especially veterans. We’ve teamed up again this year with Fox 10 and Volunteers of America to collect gifts at our office as part of 10 Caring Gifts. We’d love your help! [Read more…]
Long-term investing through dividend stocks has been a reliable method to help build wealth. If you’re investing with the goal of providing retirement income in the future, dividend stocks offer an interesting option for your equity allocation. These stocks tend to be issued by high-quality companies that are well-established in their industries and appear to be here for the long haul. One caution, though: Dividend stocks are not considered growth securities. They’re all about income growth over the long haul.
In the U.S., interest rates have remained relatively low for about a decade — since the Great Recession. Low rates are a problem for conservative bonds, traditionally a preferred investment for retirees. Because of low income yields, retirees have sought supplementary income from more aggressive holdings. One such security is the dividend stock.
The typical profile for a dividend stock investor is someone seeking income payouts over the long term, with principal preservation and modest growth. [Read more…]