Weekly Update
Stocks were up this week as global trade concerns were momentarily eased with President Trump’s announcement that the US and EU would work collaboratively to decrease tariffs and avoid a trade war. Analysts especially liked this announcement as they believe a similar approach may be made by the Trump administration with Japan, Mexico, and Canada. On Friday, we learned that the economy grew by a whopping 4.1% in the second quarter of 2018, marking the fastest economic expansion in nearly four years.
The S&P 500 had a very strong week across the board. One sore spot was Facebook, the fifth largest US company by market capitalization, which plunged nearly 20% on Thursday after it announced publicly that growth expectations were slowing. Just how big was this drop? The biggest-ever-one-day drop for a US-listed company – losing an eye watering $119.1 billion.
Lastly, there has been a lot of anxiety lately about global oil supply, swinging prices in both directions. US crude prices hit their highest level since 2014 in late June, but have fallen 6.5% this month as global supply appears to be increasing. Still, oil is up 45% in the past year.
Why a Flattening Yield Curve Matters
From a
Lender’s
perspective, due to inflation, a dollar today is worth more than a dollar tomorrow. This is one of the main reasons a lender charges higher interest rates for longer term loans and lower interest rates for shorter term loans. As a result, the yield curve typically increases the longer the loan term. This is what is referred to as a normal, or upward sloping yield curve.
From a
Borrower’s
perspective, an individual is incentivized to borrow as much money for as long as possible at the lowest interest rate possible. If rates are extremely low, borrowers tend to borrow more and for longer, usually giving the economy a boost.
From an
Investor’s
perspective, the steeper the yield curve, the healthier the economy, on average. The flatter the yield curve, the more cause for concern given the borrower’s doubt about the near future. If there is a lack of demand for short term bonds, pushing up interest levels more in line with longer term rates, it is often a sign of economic uncertainty.
Today we see that the yield curve has been flattening especially in comparison to the last few years:
