Is the trend of increasing state legalization of cannabis, commonly known as marijuana, making it the investment flavor of the day, or something that should be part of an investment portfolio? There are many issues surrounding legalization of recreational and medical use of marijuana. Pot is still federally illegal to grow and transport across state lines, which makes traditional banking and financial services more difficult until these rules are eased; and the long-term health impact of habitual use is unknown. These basic issues have yet to be addressed.
At the end of September, most major stock market indexes stood at all-time highs. The economy was booming and interest rates, while rising, still remained low by historical standards. Although the economic fundamentals have remained largely unchanged, merely one-month later much has changed in the stock market. The S&P 500 has dropped by nearly 10% this month and, after leading the market higher for the past two years, Nasdaq stocks have taken a beating in October, closing down nearly 15% this month. This performance is the worst of any month since the financial crisis began ten-years ago.
As the Federal Reserve has continued to raise overnight interest rates, talk of the flattening yield curve and subsequent recession has been increasing among investors. And with good reason, as seen in the chart below, the U.S. Treasury yield curve has inverted before each of the last six U.S. recessions. Not a bad record for an economic indicator. But what is a flattening yield curve and why is it so apparently bad for the economy?
With US tariffs on steel and aluminum already in effect, tariffs on $34 billion of Chinese made goods scheduled to start on July 6th and threats of more tariffs affecting almost $800 billion in total of imported goods, it is no wonder that the business media and markets are worrying more about the possibility of a trade war. While many commentators say these threats are simply negotiating tactics intended to bring our trading partners to the table, the specter of the Smoot-Hawley Tariffs and their crushing effect on global trade during the Great Depression tends to drive these worries.