We are currently experiencing a double whammy impacting both our markets and, I believe, our economic progress.
On one hand, we have the threat of rising interest rates….on the other…we are viewing our trading partners through a protectionist trade lens for the first time since the early 2000s.
These two factors are leading to an “unusual” economic state that goes against the grain of what should be happening in the current market.
What should be happening in the market today?
The market should be seeing positive returns, and the U.S. economy should be thriving based on current conditions--tax cuts, GDP growth, relatively low interest rates.
However, we are seeing the opposite.
The threat that the Federal Reserve will continue to raise interest rates(beyond the most recent rate hike of .25% on 12-19-18) has investors discounting the future value of corporate earnings.
The reasoning behind the Fed’s thinking?
They anticipate that organizations will produce less profit, thereby raising the cost of capital which will (could) slow economic growth. This is understandable.
When interest rates rise, typically the consumer’s behavior reverts to spending less. As consumers choose to spend less money, organization’s profits are impacted negatively.
The second part of the whammy is exemplified by the “trade war” with China.
In 2017, the U.S. imported over $500 billion in goods and services from China, making them our largest trading partner.
And China currently holds over $1 Trillion in American debt. We could go “tit for tat” on the issue of debt, but that’s not the point of this post. The investment world is uncertain about how this is going to play out, contributing to the volatility that we are currently seeing.
In conclusion, few people in today’s world have the power to change the market’s direction with just a few words; among them our President; the Chairman of the Federal Reserve; and a handful of World leaders.
The Fed’s assessment of the need for a continuation of their policy (announced last year) to implement a series of interest rate hikes has investors taking it into account against future potential earnings.
Investors are also indicating they are skeptical about the “trade war” with China being resolved before 2020.
My forecast for 2019: there may be some bumps in the road, but if you’re a long-term investor, remember: investment opportunities exist in every Market.