No getting around it: August was a rollercoaster. Market volatility increased, understandably impacting investor confidence. So what do we have to look forward to in the near future – an upswing, a downswing, more of the same?
Momentum is a double-edged sword, as it can work for you or against you. In June, it worked for investors, and carried through for much of July. In August, however, that momentum gave way to uncertainty, ending on the negative side for equity investors (although nowhere near as negative as things projected early in the month). Fixed-income investors cheered as the rally in bond prices continued, due to falling rates. As the month progressed, things calmed a bit, and when the dust settled, it turned out the sky hadn’t fallen – especially in light of year-to-date returns. Equity indexes still show double-digit gains on the year, except for small-cap and international stocks, and bond investors are thrilled with their almost double-digit YTD gains.
Anxiety persists, though, largely due to three factors: the yield curve, the trade situation, and various other economic data. You likely know that we are experiencing an inverted yield curve, which has historically been a harbinger of recession. The good news is, the argument that the country is not heading toward such a downturn is strong. U.S. interest rates are dramatically higher than those in other countries, primarily because our economy is stronger. This leads overseas investors to purchase U.S. treasuries, thus driving their price up and yields down. For this and other reasons, the pessimism surrounding the inversion of the yield curve may be slightly overblown.
Regarding the trade situation, it’s no secret that much of the market volatility is attributable to the staredown between the U.S. and China. Yes, tariffs are rarely, if ever, a good idea, but it’s clear that something must be done to address the trade imbalance. China isn’t the only front in this war, as there are also battles being fought with the European Union, as well as the matter of a yet-to-be-finalized agreement with Mexico and Canada. Until these can be resolved, volatility should be expected to continue; but once they are, the sky may be the limit as far as the markets are concerned.
With economic data, at least domestically, signs point toward continued growth, though perhaps at a slower rate. Second quarter GDP was recently revised to 2%, which was down from the first quarter, but basically in line with most of the past 10 years. Unemployment remains below 4% and inflation below 2%; oil prices are hovering in the $50 to $60 a barrel range, keeping prices at the pump low; interest rates on loans are falling, and consumer confidence is high – all good things. Globally, growth is slowing and is negative in some places, with trade issues playing a significant role. Once those are worked out, things will likely take longer strides in the right direction.
So where does this leave us? In the short term, with continued volatility, and the markets being somewhat range-bound. In the long term, should trade issues be resolved, economic activity should push higher, and perhaps dramatically so.
While summer may be about over, Badger football is back! As we head into fall, why not give our Wealth Management department a call at (608) 826-3570? We would love to schedule a meeting where your goals, objectives, and risk tolerance can be reviewed, and to make sure your asset allocation is set accordingly.