Top Gun and the Inverted Yield Curve

Ladies Night Out on Facebook

What a great time we had at California State University, Fullerton for our 11th Annual What Matters Most: Ladies Night Out. We set a record attendance for KFM Clients and Friends as we celebrated the 50th Anniversary of Woodstock with the performers from CSUF. For pictures, please check out Kemp Financial Management’s Facebook page. Thanks again for all who participated and we look forward to having our 12th annual event next year!

A few of our guests from this year’s Ladies Night Out. Take a look at our Facebook page for more photos.

A few of our guests from this year’s Ladies Night Out. Take a look at our Facebook page for more photos.

KFM Update

Kate Coogan has joined KFM effective September 9th. Kate will be taking over as Client Communication Specialist (Wyatt’s former position) assisting with client update meeting set up and preparation as well as office administration. Kate is a graduate of California State University, Long Beach with a Bachelor’s Degree in Human Development. Kate is married to Todd and has two beautiful daughters. We welcome Kate and look forward to having her as a part of our KFM Team. Make sure to introduce yourself the next time you contact the office.

Follow Up from Prior Newsletter 

As discussed last quarter, there is not any new news relating to The Setting Every Community Up for Retirement Enhancement or Retirement Enhancement and Savings Account Acts as of this writing. While this will not impact all of our clients, we have had some great conversations around “rethinking” how to distribute retirement assets to beneficiaries and charities. While any decisions should wait until the passing of one or the other acts, it’s still wise to be thinking about the issues now so that you can make informed decisions when the time comes. For more information, please see last quarter’s newsletter by clicking here.

Third Quarter Capital Markets Update: Top Gun and the Inverted Yield Curve 

In the 1986 movie classic Top Gun, Maverick (Tom Cruise) describes his encounter with an enemy jet Mig 28. It went something like this:

Maverick: Started up on his six, when he pulled in through the clouds, and then I moved in above him.

Charlie (Kelly McGillis): Well, if you were directly above him, how could you see him?

Maverick: Because I was “inverted”.

What is “inverted”? In this instance, upside down. While nobody believed Maverick, his sidekick Goose (Anthony Edwards) had a Polaroid picture to prove it.

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In August, long and short-term rates as measured by the 2-year and 10-year treasury “inverted”. It doesn’t mean “upside down” in this instance, but close. What it really means is the long-term 10-year yield was lower than the short-term yield of the 2-year treasury, also known as an “inverted yield curve”.

While I would rather talk about the radical maneuver of the pilot in Top Gun, the “inverted yield curve” has kicked off the mainstream media to begin talk about “recession” due to the inversions that occurred throughout August. While this phenomenon could be seen as a predecessor to a recession, it is not 100% accurate in its prediction.

Here is what we do know:

  • The yield curve inverted

  • We will have a recession, at some point in working with one another, more than likely two or three, depending on your current age

  • Worldwide interest rates are negative, with the exception being the United States

  • We are in a trade war with China

  • The US Dollar is VERY strong

Here is what we don’t know:

  • Was the inversion of the yield curve inverted because of “supply and demand” from negative interest rates throughout the world?

  • When will the recessions be?

  • Will worldwide interest rates ever turn positive?

  • Will interest rates in the United States turn negative?

  • When will the trade war end?

  • Will the dollar weaken against other currency?

Glancing at what we do know and what we don’t know, the real question is: Should we do something different? While we cannot answer that question for people outside of the KFM circle, we can for our clients. Other than the continued use of our rebalance process, managing cash flow and expectations, there is not much to do other than stay committed to the process.

For starters, just because the word “recession” has become more prominent in the financial media, there is not any statistical evidence that suggests all recessions are “bad”, “deep” or “equal”.

There have been 23 recessions since 1900. The average recession lasts a total of 424 days, with the longest being 1,307 (Year: 1929) and shortest 181 (Year: 1980). The daily percent change in the Dow Jones Industrial Average from January 2, 1900 to May 25, 2018 for all trading days was +0.026%. The best one-day increase in the DJIA was +15.34 (Date: 03/15/1933) and the worst -22.61 (Date: 10/19/1987). Since 1926, the average return from the capital markets as measured by the S&P 500 Index during a recession was -3.58% (we do not have statistical data or returns from the early 1900’s).

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During recessions, the average daily decline was -0.045%, with the worst one day performance was -12.82% (Date: 10/28/1929) and best one year increase of +14.87% (Date: 10/06/1931). During expansions, the average daily increase was +0.048% with the worst decrease of -22.61% (Date: 10/19/1987) and the best increase of +15.34 (Date: 03/15/1933).

For a quick recap: Inverted yield curves happen. They are not 100% predictive of recessions or future market performance, positive or negative. Recessions happen. Recession does not equal market declines like 1929, 2008, or 2009. Volatility is also the nature of the beast. Regardless of recession or no recession, staying calm and committed to the long-term will provide the confidence that you too can fly a really fast jet, upside down, like Maverick.

We will be discussing the current market environment in more detail in your update meetings in the upcoming fourth quarter.

We greatly look forward to meeting with you in person, by phone or “virtually” over the upcoming weeks and months. If anything in your financial situation has changed, please contact our office as soon as possible to discuss in more detail. We thank you again for your continued trust and confidence that you place in our organization to assist you in reaching your desires and dreams in the years to come. We also wish you a Happy Thanksgiving celebration with family and friends. As always, there is so much to be thankful for!

Annual ADV Part II and Privacy Policy Announcement

As a client of Kemp Financial Management, LLC, you received your copy of our ADV Part II at the time you became a client. Every year, we offer a complimentary copy of our most recent ADV Part II for your review and files. In addition, we also offer you Kemp Financial Management, LLC’s current Privacy Notice. You can download our ADV Part II for 2019 by clicking here: KFM 2019 ADV Part II. You can download our Privacy Policy for 2019 by clicking here: KFM 2019 Privacy Policy. Please contact Wyatt at 714-257-0800 or by e-mail at wyatt@kempfm.com in the event you would like a physical copy of our most recent ADV Part II and/or Privacy Policy. The most recent versions of both documents are always available in the footer section of our website.