Mar­ket Tur­bu­lence

The Record (Troy, NY) - - BUSINESS -

Af­ter a rel­a­tively placid sec­ond and third quar­ter one in which the S& P 500 re­turned 2.93% and 7.20%, res pec t i vely, volatil­ity has moved back to the front burner. The rise in in­ter­est rates over the past cou­ple of weeks, pushed along by hawk­ish com­ments from new Fed Chair Jerome Pow­ell ap­pears to be the cul­prit. Dur­ing a re­cent in­ter­view on PBS Pow­ell noted that “the re­ally ex­tremely ac­com­moda­tive low in­ter­est rate that we needed when the econ­omy was quite weak, we don’t need those any­more. They’re not ap­pro­pri­ate any­more. In­ter­est rates are still ac­com­moda­tive, but we’re grad­u­ally mov­ing to a place where they will be neu­tral. We may go past neu­tral, but we’re a long way from neu­tral at this point, prob­a­bly.”

De­spite these state­ments by Pow­ell, we be­lieve the Fed will err on the side of cau­tion. The United States econ­omy is still in the process of try­ing to gain es­cape ve­loc­ity from the credit in­duced Great Re­ces­sion of 2008- 09, one in which no mat­ter how low in­ter­est rates were driven and no mat­ter how much money was pumped into the econ­omy, only time and the re­pair­ing of con­sumer and cor­po­rate bal­ance sheets will prove to be the ul­ti­mate rem­edy.

We be­lieve Chair Pow­ell re­al­izes this. We also believes that he re­al­izes that de­spite the rel­a­tively strong con­sumer sen­ti­ment data, in­vestors are still fight­ing the ghosts of 2008- 09, a year dur­ing which the S&P 500 tum­bled more than 38%, ul­ti­mately drop­ping more than 50% through early March, 2009.

De­spite the above as well as the un­set­tling po­lit­i­cal en­vi­ron­ment lead­ing up to the mid-term elec­tions, we be­lieve that the fi­nan­cial mar­kets, led by strong cor­po­rate earn­ings, an ul­ti­mately dovish Fed and rel­a­tively low in­ter­est rates, will push its way higher through the bal­ance of 2018.

Now that we have built the prover­bial Wall of Worry, one that Wall Street has climbed con­sis­tently over the past decade, let us re­mind those less san­guine read­ers of the pos­i­tive tail­winds to the fi­nan­cial mar­kets.

Ab­so­lute In­ter­est rates re­main low. De­spite the rapid move higher, in­ter­est rates on the ten-year U. S. Trea­sury are only around 3.25%. Once in­vestors ac­cus­tom them­selves to this higher rate, they will re­al­ize that it will not be enough to jus­tify a shift in their as­set al­lo­ca­tion model to more fixed in­come. In ad­di­tion, we be­lieve that at least tem­po­rar­ily the bulk of this move in in­ter­est rates is be­hind us.

The ben­e­fits of the re­cent en­acted tax leg­is­la­tion have yet to fil­ter through to in­di­vid­u­als and cor­po­ra­tions in its en­tirety. We have wit­nessed glimpses of this in the form of strong con­sumer sen­ti­ment, spend­ing along with 20%+ cor­po­rate earn­ings growth, share buy­backs and wage hikes. This tail­wind should last well into 2019.

Inf la­tion, led by the global def la­tion­ary force which is Ama­zon, should re­main at bay. Without in­fla­tion, in­ter­est rates can only move so high be­fore the Fed will have to pause.

As we en­ter this pe­riod of nor­mal­iza­tion in re­gard to in­ter­est rates it is his­tor­i­cally cus­tom­ary for volatil­ity to pick up. Ex­pect more of this. How­ever, we do not be­lieve this sec­u­lar bull has com­pleted its run as skep­ti­cism re­mains high. Bull mar­kets tend to end dur­ing pe­ri­ods of eu­pho­ria.

Fi­nally, think longer term. In­vest for a com­plete eco­nomic cy­cle which is his­tor­i­cally five to ten years and al­lo­cate as­sets ac­cord­ingly. The fi­nan­cial plan that you hope­fully have es­tab­lished with your ad­vi­sor should take you through times like this. That’s what it is for. That said, if you’re feel­ing skit­tish give us a call. We’d love the op­por­tu­nity to get to­gether.

Please note that all data is for gen­eral in­for­ma­tion pur­poses only and not meant as spe­cific rec­om­men­da­tions. The opin­ions of the au­thors are not a rec­om­men­da­tion to buy or sell the stock, bond mar­ket or any se­cu­rity con­tained therein. Se­cu­ri­ties con­tain risks and fluc­tu­a­tions in prin­ci­pal will oc­cur. Please re­search any in­vest­ment thor­oughly prior to com­mit­ting money or con­sult with your fi­nan­cial ad­vi­sor. Please note that Fa­gan As­so­ciates, Inc. or re­lated per­sons buy or sell for it­self se­cu­ri­ties that it also rec­om­mends to clients. Con­sult with your fi­nan­cial ad­vi­sor prior to mak­ing any changes to your port­fo­lio. To con­tact Fa­gan As­so­ciates, Please call 518-2791044.

Chris + Den­nis Fa­gan

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