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The Word from Main Street

Special Market Update for the Week of December 3rd, 2018

The recent market gyrations have certainly garnered the attention of many investors in what is normally a pretty quiet holiday season. The financial channels are claiming that the yield curve is inverting which is an indicator of an approaching recession. Their analysis is based on the difference in yields on short-term, 3- and 5-year treasury notes, which, with Tuesday’s selloff, dropped below zero for the first time since 2007. This hand-wringing among the pundits over an inverted yield curve is overblown in our opinion. With history as our guide, Bloomberg points out that such inversions in the short-term rates have occurred seven times since the early 1950’s and all but one preceded stock market gains. Specifically, the S&P 500 Index rose a median 19 months before peaking after an inversion with returns reaching 21 percent. In addition, the difference in yields on 2- and 10-year treasury spreads is flat, not inverted.

All these concerns ultimately relate back to how fast the global economy and earnings growth will be next year and whether the Federal Reserve may raise rates by so much that they trigger a U.S. economic recession. We need to remember that economic activity remains strong, that GDP and corporate profits continue to show robust growth, that monetary policy remains accommodative, and that tax reform/deregulation has boosted activity far more than trade woes have hurt us. We need to focus on the fundamentals. It’s still heartburn, not a heart attack. Based on our trusted resources, we believe that a U.S. recession is unlikely next year and earnings growth will remain positive. 

From a technical standpoint, the S&P 500 Index is holding the important support levels set in October of this year (2,640 - 2,655) and the lows from the first quarter of 2018 (2,581 - 2,605).

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Past performance is no guarantee of future results. All investing involves risk including the loss of principal.

Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future. Dorsey, Wright & Associates developed the indicators described above. They have been prepared without regard to any particular investor's investment objectives, financial situation and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this report without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions.

Any statements nonfactual in nature constitute only current opinions and interpretations of their indicators, which are subject to change without notice. There may be instances when fundamental, technical and quantitative opinions may not be in concert. Any opinions expressed or implied herein are not necessarily the same as those of Wells Fargo Advisors or its affiliates. Any market prices are only indications of market values and are subject to change. The material has been prepared or is distributed solely for informal purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Data and opinions are current as of 12/6/18. Additional information is available on request.

Dorsey Wright’s “DALI" employs relative strength-based analysis to rank macro asset classes based on developing leadership trends within the global capital markets. The objective guidance within DALI provides the tools necessary to properly allocate portfolio across all major asset classes in an effort to emphasize strength wherever it exists. U.S. Equities, International Equities, Commodities, Global Currencies, Fixed Income and Cash are evaluated daily to identify dynamic developments across investment genres, as well as within them. This tool provides the tactical precision that allows investors to adapt as the market leadership changes.

Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of Main Street Wealth Advisors and are not necessarily those of Dorsey, Wright & Associates, LLC, Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.

Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Main Street Wealth Advisors is a separate entity from WFAFN.

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