December 2018 – 3 in 3
This month, Jason Weaver discusses the economic cycle, bond quality and stock quality. If you would like to subscribe to our monthly 3 in 3 videos, visit our YouTube channel below. At Weaver Consulting Group we’ve come to know through our clients that they like to stay informed about the economy and markets, which is why we’ve come up with “3 in 3.”
“3 in 3” is a monthly video series centered around three current market themes for the month with their accompanying data points. At Weaver Consulting Group it’s our goal to provide the maximum amount of value to you and your family. We hope this helps you feel more informed, which allows you to be more confident, so that you may find yourself inspired and worry free in retirement!
The economic cycle is a natural fluctuation in the economy between periods of expansion and contraction. There’s factors that determine where we’re at in the economy. Those are GDP (gross domestic product), interest rates, employment levels and consumer spending.
As you can see from this economic clock, if you had rising interest rates and you had very low unemployment. Consumers were spending a fair amount of money and you would see that through retail sales. It would probably be in the peak part of the economy. We call that late cycle.
There’s typical stock sectors that do better than others in late cycle. As you can see from the first chart, consumer staples, health care and utilities (in the late cycle of December 2007, March 2001 and July 1990) outperformed consumer discretionary and technology stocks.
A bond rating is a grade given to a bond that indicates its credit quality. Triple A is the highest rating you can get. Those are usually given to treasury bonds. Triple B is the bottom of the investment grade. Pay attention as this is the most important time watch your actual bonds in your portfolio. If you have bonds that are below Triple B, they’re called junk bonds.
In the second chart, you see the difference in yield between a treasury bond and a junk bond when yields spike. The price of your bond is actually going down, like the recession of 2008. We’re starting to notice that yields are starting to spike in the last quarter. Pay attention to your bond funds because they might be losing value when you think they’re supposed to be the safe part of your portfolio.
Stock quality is the equity style that describes stocks with more liability and less risks. Generally, we see that through their profitability, earning quality, financial leverage, asset growth and corporate governance. Stocks generally do better and the economy starts to slow or contract. You see from the third chart that expansion is when the economy is growing the fastest. Momentum stocks like Amazon or Google do the best then. Through slow downs, minimum volatility and quality stocks do better. For example, Johnson & Johnson or Proctor & Gamble.