Macro Musings September 2018
FED RAISES RATES AGAIN. SHOULD INVESTORS WORRY?
- There is nothing from MACROCAST™ that is suggesting that a major bear market is on the horizon.
- The Fed raised rates by 0.25% on Wednesday. Contrary to market myths, stocks have been mostly positive during rate hike cycles.
- The mid-term elections are just weeks away. Historically, the next several months are some of the best performing over the course of the so-called ‘Presidential Election Cycle’.
- The trade war is still dominating headlines. While there are some market participants that worry about this, we believe that worry is unfounded and the trade war is simply the latest issue that investors are focused on.
THE FED RAISED RATES AGAIN. HISTORICALLY STOCKS HAVE DONE FINE.
On Wednesday, the Federal Reserve raised short-term interest rates by 0.25%. The increase was fully anticipated by the market. This is the eighth rate hike since December 2015, and raises the Federal Funds rate to approximately 2.25%. The next increase is expected in December, and is also projected to be 0.25%.
While the Fed Funds rate affects everything from savings accounts to different types of loans, our biggest concern is how rate hikes will impact the market. You may have heard that rate hikes are a negative for stocks, but historically speaking, this is not true. The following chart from Vanguard shows the average annual return during previous rate increase cycles. There is only one negative period, in 1974, when the country was in the middle of a recession. In every other case, stocks were positive.
Every cycle is different, but the positive performance speaks to the fact that the Fed mostly increases rates when the economy is strong, and a strong economy drives corporate profits and consumer confidence higher. This, in turn, helps push the market up despite increased rates.
The latest reference to the ‘Presidential Election Cycle’ is in regards to the upcoming mid-term elections. For those concerned that the market will be negatively impacted by the outcome, the following chart shows that, historically, the next three quarters average some of the strongest returns during this ‘cycle’ (chart from LPL):
Again, we don’t think any of this determines market outcomes. We are more focused on long-term expected returns and what MACROCAST™ is telling us than a calendar anomaly. If you ascribe to the idea that the market’s performance correlates to the mid-term elections, historical data suggests you should be bullish in your investing approach.
TRADE CONCERNS ARE JUST THE LATEST WORRY AMONG INVESTORS
The trade standoff between the United States and China has dominated the financial news for months, but this excellent chart from the Bank of America/Merrill Lynch monthly fund manager survey shows that trade worries are just the latest investor fear du jour:
We’ve always believed that the news itself does not materially impact the markets and the economy, unless there are broader implications to that news. If there are broader implications, the impact of those implications would become evident in MACROCAST™. If the trade talks between China and the US negatively affect the economy, it will show up in the data. Until then, it will remain the latest ‘hot topic’ that people are paying the most attention to. If there was no ‘trade war’, the financial media would find something else to worry investors about.
LISTEN TO OUR LATEST PODCAST ON S&P SECTOR CHANGES
Last week we posted episode 3 of the Corbett Road podcast where we discuss the recent changes to the S&P 500 sectors and how that might affect clients. You can listen to the podcast here:
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The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions of Spire Wealth Management LLC, Spire Securities LLC or its affiliates.
All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. MACROCASTTM is a proprietary index used by Corbett Road Wealth Management to help assist in the investment decision-making process. Neither the information provided by MACROCASTTM nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. The phrase “the market” refers to the S&P 500 Total Return Index unless otherwise stated. The phrase “risk assets” refers to equities, REITs, high yield bonds, and other high volatility securities. Past performance is no guarantee of future results.
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