September NewsletterSubmitted by Rademacher Financial Inc. on September 10th, 2018
Summer fades as domestic stocks gain
The S&P 500, Dow Jones Industrial Average and NASDAQ moved higher for the month of August, along with the Russell 2000. Technical momentum is strong and all major U.S. equity indices were at or near highs on the back of strong second-quarter earnings and good economic data.
However, investors showed signs of caution toward the end of the month, seemingly concerned about U.S. trade and foreign policy, as tariffs on $200 billion worth of Chinese goods could be imposed in early September. In addition, negotiations between U.S. and Mexico have the basis of a deal. Negotiators now have 30 days to strike a deal among Canada, Mexico and the U.S. and submit the final details to Congress. As a result, domestic stocks slipped slightly on the news, even as the dollar strengthened. However, the momentary slip wasn’t enough to erase gains from earlier in the month, according to Bloomberg.
If a trilateral deal is struck before the end of September that will boost general market sentiment and relieve some of the trade fears.
Trade fears have fueled the increase of the dollar since the 1st quarter of this year. Stabilization and a decline in trade tensions could cause the U.S. dollar to reverse course.
The U.S. economy was expected to be pushed and pulled by three factors in 2018: fiscal policy, monetary policy and labor market constraints. Judging by the increase in the federal budget deficits, fiscal stimulus now appears to be larger than anticipated, adding to the economy’s momentum for the last few months of the year. The pace of job growth has remained strong, beyond a long-term sustainable pace, as there appears to have been more available slack than earlier thought. Data for early third quarter are consistent with moderately strong growth in the near term.
Here is a look at what’s happening in the economy and capital markets, as well as key factors we are watching:
- Early data for the third quarter continued to show moderately strong growth in the overall economy, with consumer price inflation trending at the Federal Reserve’s (the Fed) 2% goal.
- Consumer spending (68% of gross domestic product) appears to be trending at a 2.5% to 3.0% annual rate, following a 2.1% pace in the first half of the year.
- Fiscal stimulus (lower taxes and increased spending) has provided support for the economy in 2018, but has also added significantly to the federal budget deficit, worsening demographic strains ahead (i.e., paying for Social Security and Medicare as the baby-boom generation retires).
- The Fed is very likely to raise short-term interest rates following the September policy meeting, but officials are increasingly aware of the risks of raising rates too fast or too slow. Another rate hike in mid-December appears more likely than not, but that could change depending on the economic data.
- Increased tariffs and retaliatory measures have had a significant impact on some sectors, but little effect on the overall economy. That may change if trade conflicts escalate.
- S&P 500 second-quarter earnings season was very strong. The average stock traded 0.39% higher on its earnings report, with the best price reaction coming from the Telecom and Industrials sectors.
- Earnings continue to drive the market; however, there is widespread underinvestment, signaling room to move to the upside.
- A strong dollar favors the Consumer Discretionary sector and domestic companies with little foreign sales, since a stronger dollar tends to keep inflation in check, which puts more money in the hands of consumers.
- Technology, Healthcare, Financials, Consumer Discretionary and Industrials are all hitting their highest levels in at least three months, and Energy and Materials have been acting better recently too. The recent laggards have been the more defensive and rate-sensitive areas like Staples and Utilities which indicates that investors are becoming more confident again.
- The spread between the two- and 10-year Treasuries has shrunk from 78 basis points (bp) a year ago to the current ~20 basis points. Much is being made of a potential inverted curve. The long end of the Treasury curve remains low and may be explained by investors’ poor/bearish long-term outlook and/or foreign investors creating huge demand for U.S. investments, largely due to interest rate disparity.
- Regardless of rationale or potential outcome, the effect on long-term fixed income planning should be minimal as inverted curves and/or recessions represent relatively short moments in business cycles.
- The yield curve (looking at the 10-year Treasury yield less federal funds rate) is not inverted (a common indicator of recession), but a flatter curve bears watching.
- Increased government borrowing, somewhat higher inflation, and an improving economy would normally be associated with rising bond yields. However, long-term interest rates remain very low outside of the United States, and there has been a global flight to safety into U.S. Treasuries.
- Headlines centered on high-profile troubles in emerging markets, including Turkey and Argentina, and issues arose including domestic economic challenges, the impact of a higher dollar on debt burdens and geopolitical tensions around potential application of new tariffs and trade restrictions.
- High levels of volatility in the early part of the month did, however, progressively calm down as some investors viewed this volatility as more of an opportunity than a threat.
- Challenges remain and the direction of both the value of the dollar as well as trade talks with China and the rest of the world will be highly influential.
- With valuations low and sentiment depressed, investors can still find some diversification potential by maintaining or even establishing emerging market allocations in their broader portfolios.
- We saw some indications of modest progress in the Brexit talks between the United Kingdom and the European Union, although hopes for a final deal appear to have been pushed back.
We remain cautiously optimistic, and encourage clients to measure the success of their financial plans based on steady progress toward their goals, not the short-term vagaries of the markets. We believe you should continue to make decisions based on your long-term goals. A well-diversified portfolio should allow you to participate in upside potential here and abroad, as well as serve as ballast against any short-term volatility.
On a Personal note…
Our summer has passed by quickly. This was the first summer that Katelyn has been off in the real world working after graduation. Even though she was gone last summer on an internship it still seemed temporary. This summer definitely has more of a permanent feel to it. We still get weekly updates on Sundays from Katelyn. She has been learning a lot on her first professional campaign job. Working 7 days a week and long hours. Katelyn had a little break after the 4th of July and Garrett flew down to Florida to be with her on her birthday. It sounded like they had a great time together hanging out at the beach and exploring the area. That weekend was probably her last break before the general election in November. Katelyn is already working on her post campaign plans. She booked her ticket for December to Europe to visit a friend in Madrid and her aunt in Northern Italy. She is already thinking about campaigns to be looking at in January.
Garrett, has been programming this summer for RTP, Inc. (our rebalancing software company). He was one of 3 interns that helped Kevin rewrite the entire software platform. He mostly worked on the screen layout and design. Screen design isn’t what he wants to do in the future but, he said he learned a lot. Garrett also traveled out east late in the summer for a long weekend in the Vermont “mountains” with a small group of his close friends from college. He has enjoyed a relaxing summer but is definitely ready to go back to school. Rachel drove him out to Lafayette and got him settled. The settling in time is definitely taking less on our part as he gets older and more self-sufficient.
Rachel and I spent a week in early August camping in the San Isabel National Forest south of Leadville, Colorado. This was the first time I had taken Rachel camping outside of a campground. We had a great time hiking, mountain biking and fly-fishing (okay, that was just me). Rachel summited Mount Elbert, the tallest fourteener in Colorado at 14,440. At the end of the week, we both agreed that if we are going to continue camping we needed to improve the sleeping pad situation. So, I’m on it! I truly had a week unplugged. My cell phone died (became a brick) as we drove out to Denver on our first day. I wasn’t able to replace it until we returned home. I had my iPad and of course Rachel had her cell but, a week with no cell was great until we arrived in Taos for a 2-day meeting with Raymond James. I definitely noticed no cell at that point.
Rachel and I have been settling back into being empty nesters and are looking forward to cooler fall temperatures.
From the Office Front…
I’m happy to announce that we have added two additional members to our team – Trish Burtwistle and Gavin Rudolf.
Trish is our Client Services Associate who will work alongside Amanda to help assist with your needs. Trish hails from Lincoln, Nebraska where she worked as a Paralegal for the Nebraska Department of Banking and Finance before joining us. She loves coffee and Lawrence and is a great fit for our team!
Gavin is one of our Client Services Assistants who will be manning the front desk. Gavin is a student at KU majoring in Strategic Communications with minors in Business and Health Information Management. He joins us from the land of 10,000 lakes, having grown up in Minnesota.
We are excited to have them join our team and hope you enjoy them as much as we do. Next time you’re in the office, stop by and introduce yourself.
Catch you next time,
Phillip A. Rademacher, CFP®
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