Most people grow up thinking that changing of the tides is caused solely by the moon. It is true that the gravitational “pull” of the moon is a major factor but there are a number of other factors that cause the tides to change.
Like the tides, the global and domestic economies have several factors causing them to operate, change and shift. Recently, the domestic and global markets have seen several aspects that have altered or continue to alter their course. This article outlines a few areas affecting market conditions.
Interest Rates - Interest rate markets have seen a steady decline since the early 1990's. However, in recent years we have experienced an increase in rates. The Federal Reserve is committed to raising short-term rates because of their concern about the tightening labor market. The Fed very much wants to stay ahead of any inflation that rising wages may generate and, as a result, will likely lift short-term rates by a quarter of a percent two more times in 2018 (after March's hike). That would put the federal funds rate at 2.25% heading into 2019 with another three or four increases expected. When it comes to investing, it is important to be mindful of the bond investments you own. In a rising interest market it can create adverse effects to their values. Often a good way to protect yourself is investing in bonds with shorter durations or with a variable rate.
Inflation – Inflation is undoubtedly on the rise. It's as simple as going out to dinner and realizing the cost of goods is increasing; therefore the power of the dollar is less. For most economists, inflation is one of the most significant variables that could lead to the next market correction. In recent meetings with our clients, we are often asked about investing in gold or other precious metals; which is a common concern during periods of inflation. Commodities, like gold, have inflation protection aspects to them so, in turn, provide a balance to someone's portfolio when they own appropriate portions of the asset. When investing in commodities, it is important to consider things like how much you own and how you purchase it.
Global Relations and Trade Wars – It was not long ago that the tension of global relations between several countries was at an all-time high. On June 12, 2018, President Donald Trump and North Korean leader Kim Jong-un met for the "handshake seen around the world." The outcome of this meeting and their discussions that have followed are yet to be seen, yet it seems to have relieved some of the tension. For example, countries like China have become proactive at looking to resolve trade issues that have been proposed by the United States. Ronnie Thompson recently wrote an article detailing a few points regarding international trades.
Equity Asset Classes - The Russell 2000 index – a benchmark for smaller companies – was up 7.66 percent in Q2. While the S&P 500 was up 2.65 percent in the same time-frame. Much of this outperformance of Small Cap vs. Large Cap can likely be attributed to two things: the 2018 tax code changes benefiting small companies and the ability for more small companies to perform outside of the Domestic United States. Brice Carter recently wrote an article commentating on the tax code and how that might impact small cap vs. large cap markets.
All in all, the economic indicators of market performance remain positive. The U.S. stock market remains positive for the year, unemployment continues to maintain historic lows and consumer pricing and spending are good.
Like the tides, the markets can change at any moment and many factors can create those changes. It is important to be educated and knowledgeable about the things that can affect you, positively or negatively, when it comes to the market and that you do not react too quickly to these factors.
Your team at Financial Strategies Group is always here to help. Please do not hesitate to reach out to us with any questions or concerns on the subject matters in this, or any, of our commentaries.
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