Four things you should know about the midterm elections

by | Oct 24, 2018 | Learning

I present you with two quotes:

“Democracy is the form of government in which the free are rulers.” – Aristotle
“I tell you, all politics is applesauce.” – Will Rogers

Whichever quote best describes your attitude about the upcoming election, the fact remains that on November 6, we have an opportunity to perform our civic duty as citizens of a free country. So whatever party you belong to or opinions you hold, I hope you’re able to carve out time to vote!

Eight Things to Know about the USA-China Trade Dispute

Now, onto what this letter is really about.
With the midterms right around the corner, many clients have been asking me what the elections could mean for the markets. So, without further ado, here are four things you should know about the relationship between midterms and markets.

1. Markets usually dip before a midterm election but rise afterward.
Typically, the markets have not fared well during midterm-election years. In fact, according to one study, the S&P 500 averages a 19% decline in the months before a midterm!1

That hasn’t happened this year – as of this writing, the S&P is up slightly for 20182 – but we have seen increased volatility in recent weeks.
Of course, there are many reasons why the markets rise and fall. But one possible explanation for this trend is because elections are always preceded by uncertainty. Which party will control Congress? What new policies can we expect? What old policies will be rolled back? How will it all affect our taxes, healthcare, industries, and budget? Pundits earn their living by making predictions, but the fact is, no one knows what the future will bring until the future becomes the present.

The markets, of course, are allergic to uncertainty. It’s the driving force behind many a market pullback. And with so much uncertainty before a midterm election, it’s not surprising the markets would struggle.

On the other hand, the S&P 500 usually climbs an average of 31% in the year after a midterm.1 Again, it sort of makes sense if you think about it. After an election, uncertainty begins to fade as we gain a better idea of who is in power and what their agenda will be. In fact, the markets often rally after a midterm election. (The upcoming holiday season likely also plays a role.)

2. Historically, the markets don’t really care which party is in control.
Whether you’re a passionate conservative, devoted liberal, or something in between, the fact is that the markets aren’t as partisan as people.
Talking heads can argue till the cows come home about which party is better for the markets, but I’m not going to get into that here. (It’s not like you need another political pundit in your life!) History shows that, while some years rise higher than others, the markets tend to rise after an election no matter which party is in power.

The reason for this is simple. While politics certainly play a role, the markets are affected by many things – and Washington is not at the top of the list. Corporate earnings. Supply and demand. Interest rates. Inflation. Housing prices. Employment. I could go on. And while it’s true that the government has an influence on many of those things, the government does not dictate the daily rhythm of the markets.

If you think about it, the markets are sort like our own bodies. Our health is determined by what we eat, how much we exercise and sleep, air quality, personal hygiene, vaccinations – and of course, by things we can’t control, like our own genes. In this case, politics are to the markets what brushing your teeth is to your overall health. Both very important, but not always the difference between life or death.

As I mentioned earlier, the S&P 500 usually rises after an election. That’s been true regardless of which party is in the White House or controls Congress. Where we see the biggest difference is in whether the government is united or not. The markets tend to do the best when either party controls both Congress and the White House. It’s not hard to understand why – such an occasion would result in the least uncertainty.

When the two parties divvy up the government? That’s when more uncertainty – and more gridlock – sets in.

3. Of course, past performance is no guarantee of future results.
Just because the markets tend to do well in the months after a midterm doesn’t necessarily mean they will this time. In this case, there are some possible election outcomes that could conceivably impact the markets more than others. Republicans control both chambers of Congress If this happens, it’s possible Congress will try to extend – and possibly expand – last year’s tax cuts. Decreased regulation is also likely, and they may even take another shot at striking down the Affordable Care Act (aka Obamacare).

The markets soared to never-before-seen heights after President Trump’s election, largely due to tax cuts and deregulation, so it’s possible this outcome could bump Wall Street even higher. On the other hand, both interest rates and our nation’s deficit are getting higher, too, so even a Republican dominated Congress might decide to avoid any further economic stimulus.

Democrats control both chambers
In this scenario, Democrats may well try to roll back some of President Trump’s agenda, just as any opposition party does. And since Democrats may also decide to expand the current Trump-Russia investigation, this outcome would certainly bring a lot of uncertainty. That could conceivably have at least a short-term impact on the markets. But again, history shows that the markets do well no matter which party “wins” a midterm election.

Democrats control the House, while Republicans retain the Senate
According to pollsters, this is the most likely outcome. Should it happen, it will likely mean that neither side really gets what they want. President Trump and Republicans will be hard-pressed to advance their agenda, while Democrats will be unable to change much of what has already been done. The result? Gridlock – something most Americans are familiar with at this point. Should this happen, Washington’s impact on the markets, positive or negative, may be minimal.

4. We never make investment decisions based on politics.
No matter how many political signs you put on your front lawn, no matter if you still have an Obama “Hope” sticker on your car or a Trump “Make America Great” hat on your head, you should never make financial decisions based on politics.

This is especially true when it comes to your investments. Choosing whether to buy or sell based on who you think will win an election is the opposite of having an investment strategy. It’s investment speculation. And given how passionate many of us are about politics, it can severely color our thinking. How many people missed out on one of the longest bull markets ever because they disliked President Obama? How many people missed out on the “Trump Bump” because they disliked President Trump?

It’s true that midterms can impact the markets. But that doesn’t mean we should change or abandon our strategy. Make no mistake: This is an important time of year. It’s a time when we, the people, get to decide the direction of our country, state, and local communities.
But it’s not the time for changing the direction you take toward your financial goals.
I hope you’re able to vote next month. In the meantime, if you have any questions or concerns about Washington, the markets, or your portfolio, please feel free to contact me. If there’s one thing I can guarantee, it’s that I’m easier to get in touch with than your local politician! On behalf of everyone at Research Financial Strategies, have a safe and stress-free election day!

1 Ryan Vlastelica, “How stocks perform around midterms,” Market Watch, September 11, 2018. https://www.marketwatch.com/story/heres-how-stocks-perform-around-midterms-in-one-chart-2018-09-11
2 Per https://www.bloomberg.com/quote/SPX:IND on October 22, 2018..

Words to Live By – Change

by | Oct 23, 2018 | Learning

A major part of my job is helping people reach their financial goals in life. Over the course of my career, I’ve found that while things like planning, saving and investing are crucial, they’re not as important as qualities like perseverance, hard work, gratitude, and adaptability.

Sometimes, whenever the road to our goals seems long or daunting, it’s helpful to look for inspiration. So, lately, I’ve started sharing a few quotes that have inspired me in my own personal journey. I call them Words to Live By, and I hope they’ll help you as much as they’ve helped me.
Last month, we looked at the quality of perseverance. This month let’s look at an underrated quality: Adaptability and the willingness to change.

Words to Live By #2
Change
“There is nothing permanent except change.” – Heraclitus

Have you ever worked toward a goal only to find the process isn’t quite what you thought it would be? It’s a tale as old as time. It happens when someone starts hitting the gym after years of staying away. When someone returns to school to finish their degree. When someone starts saving for that special trip they’ve always dreamed of. When someone wants to finally write that novel kicking about in the back of their head. And when it happens, people’s responses are often the same:
“It’s harder than I thought.”
“I just don’t have time.”
“I don’t want to do it that way.”
“This isn’t how I thought it would be.”
I’ve certainly thought these things on many occasions. When I do, I remind myself of this quote by Maya Angelou:
“If you don’t like something, change it. If you can’t change it, change your attitude.”

The fact is, achievement doesn’t take place in a vacuum. It happens in the real world, and the world changes constantly. New obstacles and challenges will constantly present themselves. New demands on your time will constantly arise. The things that used to work for you before don’t work anymore. The skills you’ve long had, or the knowledge you’ve long possessed, may not be enough.
That’s why adaptability and a willingness to change are crucial if you want to reach your goals. To put it simply, the people most able and willing to change are the people most likely to be successful.

“I can’t change the direction of the wind, but I can adjust my sails to always reach my destination.”
– Jimmy Dean

When working toward your goals, accept and welcome the fact you may have to change:
• Your habits.
• Your expectations.
• Your schedule.
• Your mindset.
• Your work ethic.
• Your comfort zones.

“Intelligence is the ability to adapt to change.”
– Stephen Hawking

Change may be difficult. Sometimes, it can even be downright unpleasant. But if the goals you’ve set for yourself are truly what you want the most, then it’s absolutely worth it.

“You cannot change your destination overnight, but you can change your direction overnight.”
– Jim Rohm

As time passes, the world will change. As the world changes, our lives will change. And as our lives change, so too will the road we must take to reach our goals. When that happens, embrace it. Don’t get stuck in the past. Or, as the great Will Rogers once said:

“Don’t let yesterday use up too much of today.”
Good luck!

Weekly Market Commentary – October 22, 2018

by | Oct 22, 2018 | Weekly Stock Market Commentary

The world remains full of opportunities and challenges.
Although we’ve seen global markets moving in tandem in recent years, Sara Potter of FactSet pointed out, “…we’re starting to see the end of the synchronized global growth that has prevailed over the last two years. While the U.S. economy remains strong, growth in Europe and Japan is moderating, and emerging markets are under increasing economic and financial market pressure.”

Strong economic growth and robust earnings helped U.S. stocks significantly outperform other regions of the world during the third quarter of 2018. In addition, the resolution of some trade tensions, namely the signing of a United States-Korea trade deal and the renegotiation of NAFTA (North American Free Trade Agreement), helped soothe investor concerns, reported Jeffrey Kleintop of Schwab.

The trade relationship between the United States and China, however, remains an itchy rash marring the outlook for economic growth in both countries. The Economist Intelligence Unit reported: “Since the start of 2018 trade policy has become the biggest risk to The Economist Intelligence Unit’s central forecast for global economic growth. We now expect this risk to materialize in the form of a bilateral trade war between the United States and China, with negative consequences for global growth…The trade war comes at a challenging time for the Chinese economy…The trade war will also affect the U.S. economy…the escalating trade dispute with China will start to weigh on growth later in 2018 and into 2019 – we now expect growth to slow in 2019 to 2.2 percent (2.5 percent previously). The U.S. manufacturing and agricultural sectors, in particular, will be hit by the trade dispute, and rising interest rates will cause private consumption to slow.”

China’s economic growth slowed during the third quarter. The nation experienced its slowest growth since 2009, reported Reuters. Chinese stock markets generally lost value. However, some Chinese indices performed better than others, depending on the type of stocks included in the index. For example, the MSCI China Index, which measures large- and mid-cap stocks of various share types that trade on the mainland and in Hong Kong, was down 8.45 percent during the quarter.

In contrast, the MSCI Red Chip Index, which is comprised of stocks that are incorporated outside of China, trade on the Hong Kong exchange, and are usually controlled by the state or a province or municipality, was up 3.25 percent for the quarter and flat year-to-date.

Emerging markets were weak performers overall during the third quarter, but there were bright spots. Schroders explained, “Turkey was the weakest index market amid a sharp sell-off in the lira…By contrast, Thailand recorded a strong gain and was the best performing index, with energy stocks among the strongest names. Mexico outperformed as the market rallied following general elections and an agreement with the United States on NAFTA renegotiation. Taiwan, where semiconductor stocks supported performance, also outperformed. Despite ongoing risk of new U.S. sanctions, Russian equities also finished ahead of the benchmark, benefiting from crude oil price strength.”

Political strife continued to hamper the European Union and the United Kingdom during the third quarter. Overall company profits weren’t particularly impressive in the region and neither was economic growth, reported BlackRock.

As the third quarter came to a close, Barron’s conducted its Fall Big Money Poll. Vito Racanelli reported almost two-thirds of professional money managers from across the country said the U.S. stock market was fairly valued – and that was before the market slid lower early in the fourth quarter. While the money managers’ assessment doesn’t mean all U.S. stocks are fairly valued, there may be opportunities to invest in sound companies at attractive prices.

Trade tensions, inflation trends, and central bank monetary policy are likely to affect the performance of markets during the remainder of 2018 and into next year.

New Trend: Pets and financial planning. Animals have played important roles in human lives for centuries. They provide companionship, comic relief, work assistance, transportation, reassurance, protection, and food.

Today, emotional-support and service animals may be found in workplaces, beauty salons, cafes, theaters, airplanes, and many other places where our parents or grandparents would have been surprised to find them. Landlords charge pet rent, and some service animals qualify as a medical expense under Internal Revenue Service rules.

It is also becoming more and more common for pet owners to include pets in their financial planning goals. While you cannot leave your pet property, you can make arrangements to have your pet cared for after you are gone.

Last week, The Economist reported, “Two-thirds of all horse owners in America have made some provision in their wills for their pets, according to a survey by the American Pet Products Association. Over a third of American pet owners say they would pay for animal-related expenses by putting less into their retirement accounts. And, three-quarters of those buying a home said they would turn down an otherwise ideal property if it did not meet their animal’s needs.” In addition, pets can become beneficiaries of trusts.

Whether you think the idea of providing financial support for pets is silly or you wholeheartedly embrace it, the role of animals in the lives of many Americans is changing.

Weekly Focus – Think About It
“Animals are such agreeable friends – they ask no questions; they pass no criticisms.”
–George Eliot (a.k.a. Mary Anne Evans), English Novelist

Best Regards,
John F. Reutemann, Jr., CLU, CFP®

P.S.  Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this email with their email address and we will ask for their permission to be added.

Investment advice offered through Research Financial Strategies, a registered investment advisor.

 

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

 

 

* This newsletter and commentary expressed should not be construed as investment advice.
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* All indexes referenced are unmanaged. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* You cannot invest directly in an index.
* Stock investing involves risk including loss of principal.
* Consult your financial professional before making any investment decision.
* To unsubscribe from the Weekly Market Commentary please reply to this e-mail with “Unsubscribe” in the subject.

 

Sources:
https://insight.factset.com/global-growth-will-remain-strong-in-2018-but-risks-are-looming
https://www.schwab.com/resource-center/insights/content/whats-store-global-stocks-q4
https://finance.yahoo.com/news/apos-expect-next-trump-apos-174706046.html
http://country.eiu.com/article.aspx?articleid=987167082&Country=Nigeria&topic=Economy&subtopic=Current+policy&oid=247162408&flid=1907256774
https://www.reuters.com/article/china-economy-gdp/china-q3-gdp-growth-slows-to-65-pct-y-y-missing-fcast-idUSB9N1WQ013
https://www.msci.com/end-of-day-data-search (Click on Country tab; select China Markets; As of September 28, 2018) 
https://www.msci.com/documents/10199/aa99c3a4-d48b-44ac-8caa-49522caa9021 (Page 1)
https://www.msci.com/documents/10199/47be4803-fcea-4f25-bda4-93adac816847 (Page 1)
https://www.schroders.com/en/insights/economics/quarterly-markets-review—q3-2018/
https://www.blackrock.com/investing/insights/blackrock-investment-institute/outlook
https://www.barrons.com/articles/stocks-will-rally-more-than-10-in-2019-barrons-big-money-poll-finds-1539979367?mod=hp_LEAD_3
https://www.newyorker.com/magazine/2014/10/20/pets-allowed
https://www.usatoday.com/story/money/personalfinance/2014/10/25/pet-rent-apartments/17793493/
https://www.nolo.com/legal-encyclopedia/estate-planning-pets.html
https://www.economist.com/finance-and-economics/2018/10/13/people-are-including-pets-in-their-financial-plans
https://www.brainyquote.com/quotes/george_eliot_104038

 

 

Market Commentary – October 15, 2018

by | Oct 15, 2018 | Stock Market News, Weekly Stock Market Commentary

Like an unexpected gust of wind that blows the hat off your head or flips your umbrella inside out, last week’s stock market performance startled investors. Looking back, it’s easy to identify some of the factors that may have contributed to investors’ unease and shaken confidence in the markets. Ben Levisohn of Barron’s offered a brief rundown that included:

  • The yield on 10-year Treasuries rising to a seven-year high. As interest rates move higher, bonds become more attractive to investors who prefer to take less risk. They move money from stocks into bonds and that can push stock prices lower.
  • Federal Reserve Chairman Jerome Powell suggesting the Fed funds target rate could move higher. Investors worry the Federal Reserve is too hawkish and will raise rates too high, too quickly, causing economic growth to stumble.
  • A speech by Vice President Mike Pence indicating tensions with China may persist. Companies that export to China or manufacture goods in China are at risk if relations between China and the United States don’t improve. Poor relations could affect profits, share values, and economic growth.
  • Earnings reports showing tariffs negatively affecting some companies’ profit margins. FactSet reported, “the term ‘tariff’ has been mentioned during the earnings calls of 12 S&P 500 companies to date, with six of these 12 companies citing a negative impact linked to tariffs.”
  • The International Monetary Fund (IMF) lowering its economic growth projections. Concern about the impact of trade tensions on companies around the world led the IMF to lower some of its economic growth estimates for 2018, especially in Asia and emerging markets.

Some analysts believe a desire to take profits also helped fuel the downturn, according to Barron’s Randall W. Forsyth.

Whatever combination of events was responsible, the result was markets losing value on Wednesday and Thursday of last week before regaining some lost ground on Friday. Forsyth wrote, “What turned the U.S. markets around Friday – when the Dow and the S&P 500 managed to pop more than 1 percent and the NASDAQ Composite bounced over 2 percent – wasn’t much clearer than what set off the slide. Market Semiotics’ Woody Dorsey says that his proprietary sentiment polling found a bullish reading of absolute zero on Thursday, a contrarian indication that “panic” would be short-lived.”

While sharp drops in share values are never comfortable, it’s important to consider the bigger picture. A contributor to Bloomberg Opinion wrote, “This decline follows a market that has tripled since 2009, had zero volatility in 2017…This was the 20th time since the bear market ended in 2009 that the Standard & Poor’s 500 Index had a one-day loss of 3 percent. The NASDAQ-100 Index had its eighth 4 percent down day (although it was the biggest one-day fall since August 2011).”

In other words, selloffs are normal and we have experienced them before. So, what should you take away from last week?

  1. First, it was a reminder that stocks are volatile investments. They have the potential to deliver higher returns than other asset classes because they require investors to take higher levels of risk.
  2. Second, stock market volatility is one reason we allocate assets and build well-diversified portfolios. Holding different asset classes and diverse investments within a portfolio can help reduce the sting of unwelcome surprises like a sharp drop in the value of stocks.
  3. Worries about what the future may hold are likely to ruffle investors and we may see additional bouts of market volatility. The current bull market has been running for a long time. Some analysts anticipate recession and a bear market are ahead. As Barron’s reported, neither appears to be here yet: “Other leading indicators, including jobless claims and credit spreads, also held up. ‘I don’t see this all leading to recession,’ says Ed Yardeni, president of Yardeni Research. ‘And, without a recession, I don’t think we get a bear market.’”

No matter how intellectually rational these points seem, downturns tend to leave everyone feeling jittery and uncertain. So, take a moment. Think about your portfolio and how it was built to help you achieve your financial goals. Now, ask yourself:

  • Have my goals changed?
  • Has my risk tolerance changed?

If the answer to either of these questions is, ‘Yes,’ call us. We’ll sit down, review your goals and risk tolerance, and make sure your portfolio is structured appropriately.
We’re hoping for calmer markets ahead, but we may be in for a bumpy ride.

On a lighter note…
It’s important to recognize when daily challenges affect our ability to cope and take steps to lower stress when they do. The Mayo Clinic recommends laughter, “Whether you’re guffawing at a sitcom on TV or quietly giggling at a newspaper cartoon, laughing does you good. Laughter is a great form of stress relief, and that’s no joke.”  In the hope of offsetting some of last week’s stress, here is humor from F In Exams:
The Very Best Totally Wrong Test Answers by Richard Benson:
Question: What is a vibration?
Answer: There are good vibrations and bad vibrations. Good vibrations were discovered in the 1960s.

Question: What happens when your body starts to age?
Answer: When you get old your organs work less effectively and you can become intercontinental.

Question: What is a fibula?
Answer: A little lie.

Question: Give three ways to reduce heat loss in your home.
Answer: 1) Thermal underwear; 2) Move to Hawaii; 3) Close the door.

Question: You are at a friend’s party. Six cupcakes are distributed among nine plates, and there is no more than one cake per plate. What is the probability of receiving a plate with a cake on it?
Answer: None, if my sister is invited too.

Question: Explain the dispersal of various farming types in the Midwest.
Answer: The cows and pigs are distributed in different fields so they don’t eat each other.

Question: Name six animals that live specifically in the Arctic.
Answer: Two polar bears Three Four seals

Sometimes, laughter is truly the best medicine.


Weekly Focus – Think About It
“In the business world, the rearview mirror is always clearer than the windshield.”
–Warren Buffett, American businessman, speaker, and philanthropist

Best Regards,
John F. Reutemann, Jr., CLU, CFP®

P.S.  Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this email with their email address and we will ask for their permission to be added.

Investment advice offered through Research Financial Strategies, a registered investment advisor.

 

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

 

 

* This newsletter and commentary expressed should not be construed as investment advice.
* There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Asset allocation does not ensure a profit or protect against a loss.
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* All indexes referenced are unmanaged. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* You cannot invest directly in an index.
* Stock investing involves risk including loss of principal.
* Consult your financial professional before making any investment decision.
* To unsubscribe from the Weekly Market Commentary please reply to this e-mail with “Unsubscribe” in the subject.

 

Sources:
https://www.barrons.com/articles/heres-why-more-scares-are-ahead-for-the-stock-market-1539390914?mod=hp_LEAD_1
https://www.wsj.com/articles/surging-yields-raise-threat-of-tipping-point-for-stocks-1538913600
https://www.bloomberg.com/view/articles/2018-08-21/central-banks-are-too-hawkish
https://www.reuters.com/article/us-usa-trade-china/factbox-impact-of-u-s-china-trade-tariffs-on-u-s-companies-idUSKBN1KK23Ehttps://insight.factset.com/more-sp-500-companies-see-negative-impact-from-fx-than-tariffs-in-q3
https://www.imf.org/en/Publications/WEO/Issues/2018/07/02/world-economic-outlook-update-july-2018
https://www.barrons.com/articles/why-the-stock-market-went-loco-1539361320?mod=hp_LEAD_3
https://www.bloomberg.com/view/articles/2018-10-11/the-stock-market-meltdown-that-everyone-saw-coming
https://www.mayoclinic.org/healthy-lifestyle/stress-management/in-depth/stress-relief/art-20044456
https://books.google.com/books/about/F_in_Exams.html?id=hei-i5QP_7UC Footnote_10.pdf)https://www.brainyquote.com/quotes/warren_buffett_385064

 

How rising interest rates are affecting the markets

by | Oct 11, 2018 | Learning

It’s October, which means autumn is upon us. But this year, it’s not just the leaves that are falling. The markets have been falling, too. On Wednesday, October 10, the Dow slid more than 800 points. The S&P 500 fell for the fifth straight day. And the tech-heavy NASDAQ was hit hardest of all, dropping more than 4%.1 Both the Dow and the S&P continued sliding on Thursday, too.2

It sounds dramatic, but it’s not necessarily cause for alarm. Still, whenever market volatility rears its head, it’s useful to understand why. That’s because the more we understand the why, the less cause we have to fear it.

Before I delve into why, however, let me ask you a question. Do you remember the Greek myth of Theseus and the Minotaur? In the story, Theseus descends into a bewildering labyrinth to fight the half-man, half-bull Minotaur. But to find his way back, Theseus first ties one end of a ball of string to the entrance. Then, after slaying the beast, he follows the unwound string all the way back to the surface.

The reason I mention this story is because sometimes, navigating the markets can feel like wandering through an impenetrable labyrinth. There are so many headlines and narratives, each with their own twists and turns. The good news is that it’s possible to pick up a thread and follow it all the way back to its source, just like Theseus.

A ten-year journey
In this case, follow the thread back to the end of 2008. Seems like a long time ago, doesn’t it? Barack Obama had just been elected president. The academic paper that would lead to the creation of bitcoin had just been published. And people were just beginning to realize how bad the Great Recession would become.
To combat this, the Federal Reserve lowered the federal funds rate to almost zero.3 This is the interest rate that banks pay each other for overnight loans. Their reasoning was simple. By reducing the federal funds rate, banks could afford to lower their own interest rates to customers. Lower interest rates, of course, make it cheaper for businesses and individuals to borrow money, which spurs more investing and spending. This, in turn, could help revive America’s slumping economy. And with millions of jobs lost during the Great Recession, the economy needed all the help it could get.

Rates remained in the basement for years afterwards as the economy embarked on a long, slow healing process. In fact, it wasn’t until 2015 that the Fed finally raised rates at all.4

Now follow the string forward to 2018
The Fed has started lifting interest rates at a slightly faster pace in 2018. Recently, on September 26, the central bank announced they would raise the federal funds rate to a new range of 2.0 to 2.25%.5 Officials also suggested they might boost rates once more before the end of the year. It’s the third increase in 2018, and the eighth overall since 2015.

Why are interest rates going up? Because the economy is in a much stronger place!
Unfortunately, with that strength comes the risk of inflation. Inflation is the rate at which prices rise and purchasing power falls. For example, if the rate of inflation is 3%, then a candy bar that costs a dollar one year will cost $1.03 the next. It’s essentially the measure of how valuable your money is. And if inflation goes too high, it can make even basic living costs very expensive.

Historically, inflation goes up when interest rates are low. The Federal Reserve takes the risk of inflation very seriously. In fact, stabilizing inflation is one of the reasons the Fed was created in the first place. So, to prevent the economy from “overheating”, the Fed has slowly raised interest rates. This makes borrowing costlier and reduces spending, forcing the economy – and inflation – to grow at a slower rate.

Whew! Got all that? If so, congratulations! You’ve followed the string all the way back to the surface. We’ve finally reached the present day.

How higher interest rates affects the markets
There’s really no direct link between interest rates and the markets. The effect is more of the “ripple” variety. Despite this, higher interest rates tend to spook investors.
Remember, when the federal funds rate goes up, it costs more for banks to loan each other money. In response, banks raise their own interest rates. This makes borrowing more expensive for businesses and individuals, prompting them to cut back on spending. Less spending for businesses means less investment, less expansion – and less growth. And when investors think a company isn’t growing, they tend not to invest in that company. On the individual side, higher rates can also mean less disposable income for people to spend or invest.

There are other reasons why the markets are struggling. Falling bond prices (which are directly correlated with rising interest rates). Trade tensions between the U.S. and China. Like I said, the markets can be positively labyrinthine. But interest rates are one of the main drivers behind this sudden surge in volatility.
And now you know why.

So where do we go from here?
As important as interest rates are, they’re still just one thread. There are plenty of others that could cause the markets to rise or fall. For instance, a fresh bit of good economic news could transform this week’s fears into last week’s memories. And with the economy as strong as it is, would that really be a surprise?

This is why we don’t overreact whenever the markets lurch one way or the other. You see, when it comes to working toward your goals, we do everything possible not to fall into a labyrinth of twists, turns, and changes in direction. Instead, it’s better to keep things simple. To stay above ground. To follow our own path, not headlines or individual economic indicators.

In the story of Theseus and the Minotaur, Theseus was advised to “go forwards, always down, and never left or right” to reach his goal. The road to your goals isn’t quite so cut-and-dry. But the point is, Theseus had a plan. A strategy. And with the help of ball of string, he never deviated from it.

We also have a strategy: To diversify across a range of asset classes, choose fundamentally sound investments, and invest for the long term, not the short. And while you don’t have a ball of string, you have something even better: A team of experienced professionals dedicated to holding your hand while you work toward your goals.

It’s October. It’s a time for falling leaves, trick or treating, and an endless array of pumpkin flavored beverages. It’s not a time for stressing about the markets. So enjoy the season, remembering that here at Research Financial Strategies, we’ll keep watching Washington, Wall Street, and your portfolio. Every day, every week, every month, and every year. As always, please let us know if you have any questions or concerns. We’re always happy to talk to you! In the meantime, have a great month!

P.S. If you have any friends or family who are concerned about the markets, or don’t have a financial advisor to help them, please feel free to share this letter. Thanks!

Sources:
1 “Dow falls 832 points in third-worst day by points ever,” CNN Business, October 10, 2018. https://www.cnn.com/2018/10/10/investing/stock-market-today-techs-falling/index.html
2 “U.S. Stocks Seek Stability on Heels of Wednesday Rout,” The Wall Street Journal, October 11, 2018. https://www.wsj.com/articles/markets-tumble-across-asia-led-by-tech-as-growth-worries-dominate1539225820?mod=article_inline?mod=hp_lead_pos1
3 “Fed Cuts Key Rate to a Record Low,” The New York Times, December 16, 2008. https://www.nytimes.com/2008/12/17/business/economy/17fed.html
4 “Federal Reserve raises interest rates for second time in a decade,” The Washington Post, December 14, 2016. https://www.washingtonpost.com/news/wonk/wp/2016/12/14/federal-reserve-expected-to-announce-higher-interest-ratestoday/?noredirect=on&utm_term=.af1a4b1da520
5 “Fed Raises Interest Rates, Signals One More Increase This Year,” The Wall Street Journal, September 26, 2018. https://www.wsj.com/articles/fed-raises-interest-rates-signals-one-more-increase-this-year-1537984955

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