Many of my conversations the past week have been centered around a very popular debate……. Is the recent market volatility a correction or a sign that we are going into a recession? Due to the popularity of the topic, I thought I would share a few points that I have read from a few reputable economists. These points support the argument that the recent market action is not a sign of a recession, but rather a good old fashion market correction. I hope you enjoy the read, understand that these bullet points do not represent my political opinions and do not hesitate to reach out with any feedback.
Quotes that Apply to the Current Environment
- “Market corrections are designed to scare everyone and volatility is the emotional price that investors pay to make money when investing.” Brian Wesbury
- “Market indexes have predicted nine of the past five recessions.” Paul Samuelson
The US is Experiencing a Real Recovery
- Many economists feel the US economic recovery has been a profit and investment driven recovery and not a result of quantitative easing/TARP.
- Many economists point to the fact that we have not seen hyperinflation which is often associated with recoveries fueled by quantitative easing. It is also noted that most of the TARP money went to companies excess reserves and has not entered the economy. This is evident when looking at Japan and Europe where they have instituted negative interest rates to punish corporations from holding onto excess reserves resulting from quantitative easing programs.
- Factors that have helped fuel our economic recovery are the result of technology innovations in the areas of 3D printing, fracking, cloud technology, and smart phone enhancements, just to name a few.
What are the reasons for the Global Growth Slowdown?
- When the topic is discussed some economists reference the size of the US economy and how our countries spending decisions directly affect global growth. The bottom line is that our GDP is so large it effects everyone.
- From 1993 to 2017 the US had one of if the highest corporate tax rate structures when compared to other parts of the world. This made it very easy for major corporations to decide to operate outside of our boarders from profitability standpoint. The reduction in corporate tax rates this year has leveled the playing field and has decreased the incentive for corporations to move to other countries. Lower corporate tax rates, the reduction of subsidies and the US finally becoming a net exporter of oil has changed the ground work of the global economy.
- Weak foreign growth has not had a major impact to corporate profits. Many of the major global economies are not in recession and the reduction in profits overseas has been picked up by an increase in the US.
- When it comes to the “elephant in the room” which is the tariff debate, many experts feel that a deal will be worked out at some point. Global trade is still strong, many countries have already reduced tariffs and the correction the US is experiencing is minor compared to other countries such as China. Hopefully level heads prevail at some point……fingers crossed!
Will the Fed Continue to Raise Rates?
- Every day without fail someone on a news network repeats the famous line “bull markets don’t die of old age. They die because the fed killed them by raising rates and putting the economy into a recession”. This is true statement, however what no one knows is if/when this will actually happen.
- Most experts predict the Fed to raise rates this month and then forecasts in 2019 vary. The highest/most extreme for 2019 is 4 rate hikes. Even the highest of predictions, many still believe that the economy can handle it and this will not force us into recession. It is also important to remember that not too long ago we expected that today the 10 year treasury would be around 4.5% and bonds would have crashed. The reality is that today the 10 year treasury is around 2.9% and bonds have not crashed…..thus another reason to watch Netflix and not CNBC! Oh and if you want to go down that worm hole then let me say the final season of House of Cards did not do it for me!!!!
Bringing it All Together…….
- Please don’t think that any of what I outlined is a true predication of what is going to happen. If there is anything that we have learned over time, is that things can reverse quickly and trouble may lurk where you least expect it! My goal today was to give you some talking points as to why it is not prudent to try and time the markets, panic, or make an emotional change to your investment philosophy. Remember, it is very unlikely to make money during periods of uncertainty by zigzagging your investment positions. People that hold sensible portfolios with the appropriate amount of risk are the investors that navigate successfully through these time periods. Unfortunately, these conversations don’t make for good ratings, so they are often overlooked.
- Recently Vanguard told advisors that the environment ahead may be volatile. They expect investors who hold a highly diversified portfolio of fixed income to equity to benefit, as opposed to those who don’t. This is where I come in. My pledge to you is that I will always maintain a sensible, diversified portfolio and not increase your risk by chasing returns. My value to you is to be your trusted advisor and in times like these is when my value is hopefully as its highest!
Wishing you and your family a wonderful and safe Holiday Season!