For many years, SMI used to run a "Q&A" column in the newsletter every month where we would answer reader questions. We haven't done that in recent years, as the ability to interact in the comments on every article online has largely eliminated the need to maintain a formal/regular space for that. But with so much going on in the investment world lately — including a lot of attention being focused on challenging topics like yield curve inversions, negative interest rates, and so forth — I thought it might be interesting to "open the mic" and formally invite reader questions.

I'll start with a couple of example questions and answers to get the conversation rolling, but then I'm hoping SMI readers will post their questions (or follow-up questions) in the comments below. I'll keep circling back for a while to answer them. Hopefully, it will be a fun way to address the topics on your minds! No need to confine the questions to any particular investing or financial topic either. (Although if anyone asks about the Dodgers, you could be in for an earful.)

We've been witnessing tremendous daily volatility in the stock market recently and today is no exception. That said, the primary catalyst for today's plunge lower — the "official" inverting of the yield curve — is a big deal and I'm already seeing a ton of commentary about it, so it's worth taking a few minutes to discuss.

For those unfamiliar with the yield curve, here's a quick explanation. Short-term bonds usually yield less than longer-term bonds, as investors normally want higher compensation for putting their money at risk for a longer period of time. When this normal pattern is broken and shorter-term debt has higher yields than longer-term debt, it's referred to as a yield-curve inversion. The reason this is a big deal is yield curve inversions have preceded every U.S. recession in the past 50 years or so. We've written more extensively about the yield curve in the past and here's another good primer from MarketWatch if you want more detail.

To understand why the market is reacting so strongly to the yield curve "officially" inverting today, we need to back up a moment and talk about recessions. The commonly used definition of a recession is when the economy contracts — or experiences negative growth — for at least two consecutive quarters. There are two things that are really tricky about that though.

Well, that was quick.

Just six trading sessions ago (the Friday before last), the S&P 500 set its most recent all-time high. As we've pointed out several times, other parts of the stock market haven't been as strong — notably smaller-company stocks never have eclipsed their highs from last August. But the S&P 500 and Nasdaq indexes were at all-time highs less than two weeks ago.

Now, as I write this, the S&P 500 is down around -6% from those highs, with more than half of that coming today.

There are no changes to the DAA lineup for August. Read on for the full details.

DAA is a core portfolio strategy that is designed to help SMI readers share in some of a bull market’s gains, while minimizing (or even preventing) losses during bear markets. The strategy involves using exchange-traded funds to rotate among six asset classes, holding three at any one time.

DAA is a defensive, low-volatility strategy that nonetheless has generated impressive back-tested results when evaluated over full market cycles, demonstrating the power of "winning by not losing."

The recommended categories/ETFs for August are (in order of current momentum):

For half an hour after the Fed announced today that it is cutting interest rates for the first time in 10½ years, the markets stayed calm and it looked like we might be able to make a normal call on DAA. Then Chairman Jerome Powell started talking at 2:30 p.m. ET and the markets went wild.

There is no change to the official SR recommendation for August. Read on for the details.

Sector Rotation is a high-risk/high-volatility strategy. While its peaks and valleys have been more extreme than SMI's other strategies, it has generated especially impressive long-term returns, as discussed in Sector Rotation Is Risky, But Highly Rewarding.

There are no changes to Stock or Bond Upgrading for August.

At the rate the financial markets respond to new narrative themes these days, it’s no surprise the three-month span of the second quarter was plenty of time to take investor emotions from optimism to despair to glee.

The quarter began with “Goldilocks” expectations: an economy neither too hot nor too cold, and interest-rate expectations to match. The economy was widely thought to have cooled just enough to halt the Fed’s multi-year rate hiking campaign, but not so much as to threaten the economy with recession. This combination led to strong April stock returns, while bonds were largely flat.

The May pivot to recessionary expectations, based largely on the breakdown of trade talks between the U.S. and China, was rapid and the impact on financial asset prices was immediate: stocks tanked and bonds soared. But following the modern script that investors have become familiar with (and reliant on?), the Fed quickly responded to the market’s cry for help. Fear not, they reassured, rate cuts would be quickly forthcoming if the economy were to slow further. There’s nothing modern financial markets like better than Fed intervention and rate cuts, so that was just the ticket to turn May tears into June laughter.

The first half of 2019 was the strongest start to a year for stocks since 1997, and most other asset classes also experienced strong returns. Bonds, real estate, gold — it was a great first half for investors of nearly all stripes. SMI investors certainly benefited from these strong returns as well.

SMI celebrated a significant anniversary last month, which got me thinking, as the celebration of such milestones often do. Here are a few brief thoughts regarding a few significant numbers related to SMI’s history and the current market situation.

• 30: Amazingly, last month kicked off SMI’s 30th year. Much has changed since Austin published that inaugural July 1990 newsletter. But SMI’s fundamental reason for being hasn’t changed — we still want to be a trusted guide that Christians can rely on to help them navigate the investment maze. And as we travel together, we hope to incline each member’s heart toward ever-greater generosity, helping you have more so you can give more to further the cause of Christ and bring Him glory!
   
• 20: This is my 20th year working alongside Austin at SMI, as well as the 20th year of SMI offering web memberships. The timing of our web launch seemed terrible at the time, corresponding as it did to almost the exact moment the market peaked in March 2000. But what eventually became clear to us — particularly once we started blogging regularly in 2003 — was that members rely on us much more during market downturns than during the good times. Perhaps God could see wisdom in that timing after all!
   
• 15: In November 2003, SMI’s first Premium/Advanced strategy launched after many months of research. This was the first strategy Austin and I developed together and it’s turned out pretty well! Even after a few recent missteps, Sector Rotation’s annualized return since launch has been +13.5%, while the overall market has earned just +9.2%. That means every $1,000 invested in SR has grown to $7,281 vs. just $3,989 for the market.
   
• 10: I’ll transition now to market-focused numbers. Earlier this year, both the current economic expansion and the bull market in stocks celebrated their 10th birthdays. That makes the expansion the longest in history, while the bull market ranks among the longest as well. This “10” number has a bittersweet element to it, however, because of the perpetual cycles that drive both the economy and financial markets. While investors have enjoyed the huge gains the markets have delivered over the past 10 years, the length of these current uptrends is a reminder that recessions always follow expansions and bear markets always follow bulls. There’s no escaping their cyclical nature.
  
  However, SMI hasn’t been idle during this favorable half of the cycle. In 2013, we released our first truly defensively-oriented strategy, Dynamic Asset Allocation. And last year we introduced defensive protocols to our flagship Upgrading strategy. The combination of these new tools make us confident that SMI member portfolios are better prepared to weather an oncoming bear market than ever before.
   
• 5: The next five years seem likely to be a transitional period along the lines of 2000-2002 or 2007-2009. The question is less whether change will come during the next five years, but what type and how severe will the change be? In hindsight, while the depth of the bull markets referenced above were similar, 2000-2002 was a more “routine” bear than 2007-2009, which revealed significant problems in the financial markets and led to dramatic changes (such as the Central Bank takeover of the markets) in its aftermath. Will the massive global debt buildup of the past decade come to a head as an emerging crisis, or will it be kicked down the road to be dealt with later? Whatever the answer, we’ll be here to help interpret and navigate whatever the markets throw at us.
   
• 1: The most important number — one — is you! We’re committed to helping you get whatever degree of assistance you need to succeed financially. For many, that’s “do-it-yourself — with help” through this newsletter, with the relationship looking much as it has for the past 30 years. Many have already built on that by adding a deeper level of personal financial planning via the MoneyGuide Pro® software that has been available to Premium SMI members in recent years. And a growing number (nearly 400 households already!) have decided to outsource their investing to the Private Client team at SMI Advisory Services, enjoying a new level of personal service.

It’s been a great joy spending the past 20 years helping to build out the array of choices now available to SMI members. Whatever level of engagement you decide is best for your current situation, we appreciate your choosing us to walk alongside you on your financial journey!

Why Upgrade?

SMI offers two primary investing strategies for “basic” members. They are different in philosophy, the amount of attention they require, and the rate of return expected from each. Our preferred investing strategy is called Fund Upgrading, and is based on the idea that if you are willing to regularly monitor your mutual-fund holdings and replace laggards periodically, you can improve your returns. While Upgrading is relatively low-maintenance, it does require you to check your fund holdings each month and replace funds occasionally. If you don’t wish to do this yourself, a professionally managed version of Upgrading is available.

SMI also offers an investing strategy based on index funds called Just-the-Basics (JtB). JtB requires attention only once per year. The returns expected from JtB are lower over time than what we expect (and have received) from Upgrading. JtB makes the most sense for those in 401(k) plans that lack a sufficient number of quality fund options to make successful Upgrading within the plan possible. Here are the funds and percentage allocations we recommend for our Just-the-Basics indexing strategy.