Tar­iff jit­ters and pre­par­ing for even­tual slow­down

South Florida Sun-Sentinel (Sunday) - - Success - Jill Sch­lesinger Jill on Money Jill Sch­lesinger, CFP, is a CBS News busi­ness an­a­lyst. A for­mer op­tions trader and CIO of an in­vest­ment ad­vi­sory firm, she wel­comes com­ments and ques­tions at [email protected]­lon­money.com.

The first week of De­cem­ber was an ex­haust­ing one for in­vestors, even though there were only four trad­ing ses­sions.

It be­gan right af­ter the G-20 Sum­mit, when the United States and China an­nounced a 90day trade war time out. While all cur­rent tar­iffs will re­main in place, the U.S. will not raise the rate from 10 per­cent to 25 per­cent on $200 bil­lion worth of Chi­nese im­ports, which was slated to oc­cur Jan. 1. The news was re­ceived well and in­vestors pushed up stock in­dexes.

But the eu­pho­ria wore off 24 hours later, af­ter Pres­i­dent Trump tweeted that he is a “tar­iff man,” fol­lowed by an­other in which he ques­tioned whether a “real deal” with Beijing is pos­si­ble. In­vestors ran for the hills, push­ing down stock in­dexes by 3 to 4 per­cent.

Trade ten­sions between the world’s two largest economies es­ca­lated af­ter the ar­rest of Huawei Tech­nolo­gies’ chief fi­nan­cial of­fi­cer Meng Wanzhou on al­le­ga­tions that she vi­o­lated U.S. sanc­tions against Iran.

All of these events come amid a nag­ging anx­i­ety about a global growth slow­down. One sign of that ten­sion was seen in the bond mar­ket.


Let’s start with some ba­sics. Typ­i­cally, it should cost less to bor­row for shorter pe­ri­ods of time than longer ones. So when you buy a

10-year govern­ment bond, the in­ter­est rate is nor­mally higher than when you buy a two-year (the dif­fer­ence between those two in­ter­est rates is known as the “spread”).

You get paid more for a longer term be­cause a lot can hap­pen in the fu­ture, most no­tably, in­fla­tion can eat away at your fixed bond pay­ments. There­fore, bond buy­ers usu­ally de­mand higher rates to com­pen­sate them for the ad­di­tional risk of hold­ing the as­set for a longer time pe­riod.

When you plot in­ter­est rates on a graph, a nor­mal yield curve will slope up; the steeper the slope, the more that in­vestors think that in­fla­tion and in­ter­est rates will rise in the fu­ture. When in­vestors be­lieve that growth is slow­ing and that the rate of in­fla­tion will be tepid in the fu­ture, the yield curve flat­tens out. That’s kind of where we are right now.

But, when short-term rates are higher than long-term rates, the curve in­verts, mean­ing that it slopes down. Here’s the hair-on-fire part: Ev­ery U.S. re­ces­sion for the past 60 years fol­lowed an in­verted yield curve, though some­times not un­til months or even years later.

In early De­cem­ber, the gap between three­and five-year govern­ment bond yields dropped be­low zero for the first time since 2007 and the spread between two and ten year bonds, the most im­por­tant re­la­tion­ship to in­vestors, de­creased to 0.11 per­cent, the nar­row­est since

2007. That’s not tech­ni­cally in­verted, but it got al­ready freaked out in­vestors even more freaked out.

Be­fore you rush to the exit and sell ev­ery stock or stock mu­tual fund that you own, re­mem­ber that you are a long-term in­vestor who is not go­ing to fall for the age-old trap of think­ing you can time the mar­ket. In­stead, re­mind your­self that you do not need to fig­ure out when the next re­ces­sion is com­ing, but you do need to have ad­e­quate emer­gency re­serves and a di­ver­si­fied port­fo­lio that will al­low you to sleep at night when the even­tual slow­down oc­curs.

Let the so-called ex­perts try to pre­dict whether cur­rent stock val­u­a­tions are too high, rel­a­tive to the abil­ity of com­pa­nies to make money in amid a slower growth en­vi­ron­ment, while you en­joy a stronger batch of eggnog this hol­i­day sea­son.

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