TW3 – A Harbour Bridge A Day Keeps the Downturn Away

Market Wrap

Global markets trended lower in what can only be called a rollercoaster week. Monday saw the largest single day gain for global shares in 2018 after reports that the US and China had reached a truce in the trade war. Those gains evaporated the very next day after Trump tweeted that he is “a Tariff Man”, whilst a minor inversion of the yield curve prompted fears that the US economy could be headed towards recession (more on yield curves in this week’s Finance 101).

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US markets were closed yesterday in honour of former US President George Bush Snr, and it appears that traders felt obliged to cram two days’ worth of volatility into one. US shares were down almost 3% at one point overnight, with hopes of progress in the trade war being dashed by reports that the CFO of Chinese tech giant Huawei was being extradited to the US for violating US sanctions with Iran. These losses were subsequently erased after a report that the Federal Reserve is considering taking a “wait-and-see” approach with interest rates in 2019, meaning that the current rate hike cycle may come to an end sooner than expected.

In local news, the Australian Dollar fell after the economy had its weakest quarter in growth in more than two years. Sputtering growth, in addition to subdued inflation, have likely ruled out a 2019 RBA rate hike.

Finance 101 – The Yield Curve

Bond investors receive differing yields depending on the maturity of their investment. By plotting these yields and maturities on a graph, investors can try to make inferences on the market’s expectations for future economic growth. In most instances, investors in long term bonds will receive a higher return than investors in short term bonds as they are exposed to higher risk. Longer term bonds are more sensitive to changes to interest rates, inflation & creditworthiness, and there is an opportunity cost in investing in bonds rather than stocks. When the yield curve slopes upwards (longer-dated bonds yield more than short-dated bonds), the market typically expects economic growth and inflation.

But what if the curve inverts? This is where yields on longer dated bonds fall below yields on short term bonds. In these instances, it implies that the market is pessimistic about economic growth. Every US recession since 1945 has been preceded by an inversion of the yield curve, which means investors place great significance on it. This week markets sold off heavily after the yield curve “inverted”. However, when we actually look at the yield curve, we can see that it is still sloping upwards.

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For those wondering what a meaningfully inverted yield curve looks like, here’s a comparison of the yield curves of US bonds in 2005 and 2006.

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But what if the yield curve actually inverts? Would that mean that a recession is on the horizon? Not necessarily. Unlike the natural sciences, there are no universal laws and principles that can be applied to investing. In the words of the Nobel prize winning American economist Paul Samuelson “the stock market has predicted nine of the past five recessions”.

A Guide to Ethical Investing

Due to popular demand, we have written a white paper on Ethical Investing! Given that we all have differing values, there is no one size fits all solution to ethical investing. The aim of our White Paper is to help socially conscious investors find the product that is most congruent to their personal beliefs.

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Are there any other topics you’d like us to cover? Please let your adviser know!

Putting Property Prices in Perspective

Property investors hoping for an early Christmas present found coal in their stockings this week, with Sydney’s market falling a further 1.4% in November, its sharpest monthly decline since peaking last July. Sydney’s housing market is now down 9.5%, and is on track to eclipse the previous record decline of 9.6% seen during Australia’s last recession in the early 1990s.

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Source: CoreLogic

A growing number of homeowners are heading for the exits, with listings increasing by 7.5% in November and 20% over the last year.

Despite the gloom and doom, we should keep the recent downturn in perspective!

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A Proper ATO Rort

An unfortunate side-effect of the technological revolution is that scammers can steal your money at the press of a few buttons. More than $800,000 has been swindled from Australians in the last month from scammers posing as the Australian Tax Office in intimidating phone calls. Please stay vigilant with all matters involving money. Speak to your adviser if you are unsure.

More often than not, a simple google search can expose a scam. We were contacted by a client recently after they received an email promoting a program where investors would learn to buy property at discounts of up to 40%! As per usual, if it sounds too good to be true it usually is, and a perusal of the online reviews revealed the program for what it is.

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The Australian Competition and Consumer Commission publishes the little black book of scams, which is a valuable resource for readers of all ages.

SB Market Insights Podcast

In our final instalment for 2018, Ashley and Jonathan cover the recent sell-off in equities, the Royal Commission and how many harbour bridges worth of steel China produces each day! Click on the image below to listen. And we need a more engaging title than ‘Market Insights’. All suggestions gratefully welcomed! You can subscribe to our podcast on iTunes. Please give us a 5-star rating if you enjoyed. Thank you.

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Sold-Out Seminar Success!

Almost 200 attendees packed into the Kirribilli Club last week to hear from Noel Whitaker and Bettina Arndt on a diverse range of subjects …to say the least!

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Those who were unable to attend can watch here.

Who Am I?

Last week’s instalment of Who Am I featured a young Eric Clapton! Congratulations to David and Ronit!

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But who is this young rooster?

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Pic of the Week

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Video of the Week – Bored Teachers

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Have a great weekend!

Jonathan Hoyle, CEO & Nicholas Stotz, Investment Analyst

Stanford Brown

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