It was a short, but volatile week for U.S. markets, which were closed on Wednesday, in remembrance of President George H.W. Bush.
The big story this week was the partial inversion of the U.S. Treasury yield curve, as stocks swung violently against each conflicting headline resulting from ongoing trade talks with China and potential OPEC production cuts.
The yield curve is an important barometer for stock investors of all shapes and sizes. In general, the curve slopes upward over time, as positive economic growth and inflation tend to go hand-in-hand.
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However, the curve inverted this week, when 5-year interest rates moved below 2-year rates. The real canary in the coal mine for economic watchers is the 2-year interest rate versus the 10-year rate, which has inverted prior to every U.S. recession over the past 50 years.
While this warning sign has created a false alarm or two over the decades, it’s no surprise that some folks are concerned the 2-year and 10-year notes are within 10 basis points of each other, which is the flattest since 2007.
You Can Still Make Money After Inversion
A recession does not necessarily spell doom for all investors. According to a study published by Jefferies this week, stocks traded higher between the yield curve inversion and actual sign of U.S. recession (an average of 21 months later) each of the past five instances.
For one thing, slower economic growth favors taking a more defensive stance, which should benefit dividend stocks. To this point, Tuesday was the single best trading session for defensive stocks versus cyclical names in more than two years.
Taking Cues from Overseas
The volatility in the first half of the week was driven by ongoing trade talks with China, while the OPEC meeting in Austria sparked trading activity in the latter half.
Looking ahead to next week, we may be taking our cues again from overseas, as the final Brexit vote will be cast in U.K. Parliament on Dec. 11. This year has been marked by the return of trading volatility and the headlines out of London next week will likely create some more white-knuckle moves.
Protecting Capital and Generating Income Despite Volatility
Tuesday marked the fifth 3% daily decline in the U.S. for 2018, which is the highest number of such occurrences in seven years. The average investor shies away from volatility, even though it often provides us the opportunity to be contrarian.
If you’re at or near retirement, you’re probably sick of seeing your investments fall as much as 3% in a single day.
All you really care about is generating consistent income and protecting your hard-earned nest egg, whether the broader market is up 10% one year or down 10% the next.
The good news is: there’s a better way. My colleague Brett Owens has created an “8% No-Withdrawal Portfolio” that generates steady income and impressive capital gains. Thanks to his work, you no longer have to settle for low bond yields or dividend “aristocrats” that can fall as much in one day as they pay over an entire year in dividends.
Wall Street has tried to address this issue with structured products, such as single premium immediate annuities (SPIAs). But just like the casinos don’t pay for all the glitz and glamour because gamblers usually win, the big financial service firms charge hefty fees to provide you with that steady income.
Instead, Brett’s system could hand you $40,000 a year on every $500,000 invested (in an up market or down one) with under-appreciated income plays like:
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