1st Quarter 2018 – That Was Quick
Did the 1st Quarter 2018 already end? Wow!! That was fast!
If you were able to fall asleep on New Year’s Eve 2017, open your eyes on March 31, 2018 to see the stock and bond markets both ONLY slightly in the red for 2018, you may have concluded, “that was expected after such a good year in 2017”.
Then after you awoke and scoured the various market/economic periodicals to see the following:
- We experienced one of the quickest 10% Stock Market Corrections in history!
- The US 10 year Treasury yield increased from 2.41% to 2.74%
- The Federal Reserve increased interest rates 1x, so far.
- Tariffs are now being slapped on incoming goods and now some outgoing goods.
- Facebook (we) has a privacy issue.
- This was the first quarter of “Tax Reform” or shall I say “Tax Cut”.
- How many people have been “FIRED” by President Trump?
- President Trump is now after Amazon for Tax Revenue?
Perhaps the next paragraph will explain why the markets are “hanging in there,” for now.
In a few weeks, we’ll begin to hear and read about 1st Quarter Corporate Earnings, which are expected to be robust, on their way to another record year. As always, time will tell if this holds true. The answer I’ll be looking for, if Corporate Earnings do meet or exceed expectations, will that be enough to push the markets out of this corrective environment?
Bonds in Reverse?
Even with the Tariff issue consuming most headlines, what happens with interest rates may have a significantly greater impact on the economy, corporate earnings and stock and bond pricing. That is not to say if the Tariff issue escalates, we won’t feel a serious impact on the economy, our wallets and our investment accounts.
- Since 2009 through October 2014, our Federal Reserve purchased and has accumulated a total of approximately $4.5 Trillion in US Government Notes/Bonds and US Mortgage Bonds. The idea was for the Federal Reserve to tamp down interest rates and provide liquidity into the various markets. After successfully witnessing the economic recovery and the markets hitting all-time highs, our Federal Reserve is in the process of reversing those bond purchases. For now, they are letting a portion of the monthly “maturing” bonds that were previously purchased, mature into cash. Previously the Fed was immediately reinvesting the matured proceeds into additional bond purchases in an effort to stabilize rates. One concern is this will have the opposite effect, thereby placing upward pressure on interest rates.
- As the Federal Reserve was purchasing bonds, they were also lowering rates and then kept them level for a significant amount of time. Now the Federal Reserve is in the process of increasing interest rates, albeit, at a slow pace thus far.
- Factor in that most people will see their net income increase as a result of the recent tax cut and most people have historically spent most additional income.
- There has been ample discussion that the European Central Bank (ECB) may stop or lesson the amount of bonds they have been purchasing to stimulate their economies.
Add all of this together and you should have an environment where interest rates will continue to rise. Inflation hawks are on the look-out. Historically, the stock market has fared well during the initial rate hike cycle, however, how high do rates need to go this time before the higher rates pressure housing, automobile markets, increase corporate borrowing costs and slow down overall markets and the economy. We’ve been asking for inflation for years. Hopefully, we won’t regret getting what we asked for!!
Paul’s Take – The Week Ahead
On Monday we’ll hear about the US Manufacturing Index. On Wednesday, we’ll hear about the Non-Manufacturing (Service) Index, however, Friday brings in the perhaps the most important data point of the week, JOBS. The estimate is for the creation of 189,000 new jobs. What will the number be? Whatever the number, it will be highly scrutinized.