Dear clients and friends,
At Perseus Wealth it is very important to us that you are well informed about what’s happening in the markets. Here is a brief recap of what has been going on over the last month or so and what we expect in the month ahead. As always, please call us with any questions.
What’s happening now:
- Rising Rates – Yield on US 10 Year Treasury bonds increased to over 3.20%. Global equity markets sold off considerably in the days/weeks following. Rising long terms rates can affect stock valuations by raising financing costs on debt and devaluing future earnings. It would seem that the extent of the selloff was too pronounced and equity markets should stabilize or even move higher based on strong economic data and corporate earnings.
- Market Volatility – As mentioned, volatility returned to the market in early October. The VIX index hit levels not seen since March 2018. As the election approaches and concerns about the US/China trade war still linger, look for continued market volatility as 2018 winds down. Market volatility has been abnormally low for a long period of time and higher levels are actually more the norm.
- Fed’s Reaction – The Federal Reserve minutes showed a general opinion that rates can be increased to a level above what would be described as neutral. The Fed is not giving the market indications that it plans to slow down the pace of rake hikes in the foreseeable future. We expect that the Fed will raise short term rates one more time this year and three to four times next year. Looking at nominal GDP over time, one would expect a neutral Fed rate to rest somewhere around the 4% level.
- Budget Deficit – The US budget deficit increased to $779 billion in the 2018 fiscal year, a 17% increase from the year prior. Critics of the tax cut blame it for the lack of revenue. President Trump has asked his cabinet members to cut at least 5% from their annual operating budget. Regardless, the US total debt has surpassed $21 trillion with no substantive plan to reduce that number. Earned benefit/entitlement spending and the deficit will likely be common talking points during election season with ultimately little direct impact on equity markets.
- Brexit – During a summit between European Union and United Kingdom leaders, both sides failed to reach an agreement on terms of the UK’s exit from the EU, scheduled for March 29, 2019. Discussions on trade and an orderly exit plan have not been finalized and could extend far into 2019 as Theresa May deals with critics at home. This “unfinished business” should add volatility to international equity markets until the Brexit is final – and potentially thereafter.
The month ahead:
All eyes will be on the mid-term elections. Early odds are that the Republicans will maintain control of the Senate and the Democrats will overtake control of the House. There are no scheduled discussions between US and Chinese leaders to alleviate the ongoing trade war. Any news that would indicate negotiations between the two countries could be positive for equity markets. In the meantime, expect volatility to maintain higher levels than witnessed over the summer.
The bottom line:
Stable and healthy economic data continue to be the norm. At this time, there is little economic data that supports a recession in the near term or intermediate future.
John and Sean
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that any strategy will be successful.