The yield curve plots the yield of a bond, say Treasuries, against various maturities. In a normal environment, a longer maturity equates to a higher yield (blue line below). That’s not the case today, as the graphic below illustrates (red line).
The recent inversion of the US Treasury yield curve has had the financial press in a bit of a frenzy.
Oxford defines uncertainty as “not completely confident or sure of something.”
There is always some degree of uncertainty for stocks.
- Stocks have a long-term upward bias, but no one can guarantee where a major market index like the Dow1 will be one year from today.
Investor sentiment is sometimes driven by what I call “heightened uncertainty.” In other words, the number of potential economic outcomes increases.
- These potential outcomes are usually to the downside.
Geopolitical issues, such as unrest in Hong Kong, can influence sentiment. Or, how might the U.S./China trade war affect the economy?
- The additional scenarios create heightened uncertainty and market volatility, as investors attempt to price in how rising trade tensions may affect the economy and corporate profits.
My goal in these weekly commentaries has been to educate, touch on important high-level themes, relay them in a conversational tone, and view events through the narrow lens of the investor. I must admit, when markets and politics collide, that goal of the narrow lens can be difficult. That said, with as much objectivity as I can muster, let’s recap recent events.