Market update – June 2019

Blog post #397

We always advise you to focus on the long-term and today is no different.

Years from now, the market moves of the past 6 weeks or few months will not be remembered and will likely be irrelevant to your long-term financial future.

However, at times it is important to review what has been occurring in the financial markets, so you can have a better understanding and perspective of the financial world.

We feel the main factors that have influenced stock market and economic movements in recent months are:

  • trade war and tariffs
  • interest rates
  • oil prices
  • still solid economic figures, such as generally strong earnings and employment numbers.

Trade and tariff issues: Over the past 6 weeks, since May 5th when President Trump announced new trade tariffs on China and more recently potential new tariffs on Mexico, global stock markets have declined. We cannot forecast how these trade matters will play out, as to who will win and who the losers will be.

We generally are in favor of free trade, if the playing field is considered fair to all parties. As many observers of International trade matters feel that China does not treat US companies fairly, the longer term goals and objectives of the Trump administration may be worth pursuing, even if they cause some near-term problems.

As in most situations, businesses and markets adjust to new realities. Already, we are reading that major companies that produce goods in China are implementing and making plans to change where they manufacture these products, away from China to avoid these tariffs. This will likely cause/force China to be more willing to reach an agreement at some point with the US administration.

While these recent developments have caused declines in broad US and International stock markets in recent weeks, on a year to date basis most major asset classes remain positive for the year, with wide variances between asset classes.

Interest rates: Interest rates within the US and globally remain historically very low and have dropped significantly in recent months. The 10 year US Treasury Note is considered a benchmark for many loans, including mortgages. The 10 year rate peaked at 3.2% in early November, 2018, when fears of rising interest rates caused stock markets to decline.

Since then, the 10 year Note has decreased dramatically to around 2.1%. Some feel the cause of this decline is due to concerns of slowing future economic activity. Others attribute the drop to foreign factors, as interest rates in most of the world remain far below these levels.

Earlier this week, Fed Chair Jay Powell stated that the Federal Reserve “did not know how or when the trade issues will be resolved….(but) as always, we will act as appropriate to sustain the expansion (of the US economy).” This was interpreted as another step towards the Fed decreasing/cutting short-term interest rates, and certainly not increasing them, as the Fed was projecting in the fall of 2018 for most of 2019.

Whatever the cause, many economists and forecasters are now predicting the Fed to decrease short-term interest rates later in 2019, which is a complete reversal from what most were predicting a year ago, or even 4-6 months ago.

This change in the Fed’s position in Tuesday’s speech led to one of the largest daily gains of 2019 for the US stock market. On Monday afternoon, stock market analysts were gloomy and pessimistic. And then on Tuesday, markets had their best day since January 4th. This is just another example why we advocate not trying to time the stock market.

Oil prices: Interestingly, oil prices peaked in early October, 2018, about a month earlier than the interest rate peak. Oil prices, as defined by WTI price per barrel, peaked at $76.41 on October 3, 2018 and have dropped to nearly $51 per barrel, a decline of over 30%.

The huge oil price drop can be attributed to many factors, including a perceived decline in demand due to a potentially slowing global economy, as well as increased supply in oil due primarily to US production increases.

Demand will always fluctuate based on changing needs and economic swings. The more important long-term trend that has had a major impact on oil prices is the huge increase in US oil production over the past years. We think this is a significant positive, which will have an ongoing positive influence for corporations and consumers alike, as it will provide for a cap/limit on oil prices. If overseas oil producers reduce production to limit supply, that would temporarily drive oil prices higher. And those higher prices will induce even greater US production, which would then drive oil prices back down.

Takeaways:

  • The trade tariff issue will cause short term volatility and the outcome cannot be predicted in advance. There are likely to be settlements at some point, but there will also be new threats, new tariffs and unexpected surprises along the way, both positive and negative.
    • These issues should not cause you to change your investment policy or strategy.
  • The decline in interest rates and oils prices are good for the economy and may in fact prevent a recession or economic slow down, if one was even going to occur.
  • Cheaper oil prices and lower interest rates are good for consumers and companies, as it makes buying and producing products cheaper. It makes house purchasing cheaper, transportation less costly…..all positive factors.

We hope this information is helpful to you.

Again, it is in your best interest that your investment policy for the long term should not be influenced by short term trends and issues.

But understanding why markets have reacted over the last few days or months may be important for you to be aware of. If this can provide you with that knowledge and comfort, than our guidance and insights are valuable.

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