Contributed by: Angela Palacios, CFP®, AIF®
Trade wars and tariffs have dominated the headlines over the past quarter. Volatility has increased for equity markets around the world because there are fears stemming from the possibility of a trade war. To learn more about tariffs and what we think about how this could impact the markets click here.
The Federal Reserve (FED) raised rates as anticipated in March. This is the first rate hike of the year. There are two more rate hikes widely expected to come this year. Gross Domestic Product (GDP) growth has been slightly ahead of what has been expected; so, this could hint at a faster rate hike path than anticipated. Economists were expecting growth to come in at 2.7% for the 4th quarter and it came in at a revised 2.9%. Good news for the economy as we are growing faster and seem to be on solid footing. However, if the market thinks that the FED will start to raise rates faster in response to increased growth, this could negatively impact bond prices as their yields increase. Both consumer spending and business investment have been strong. Payroll taxes went down in February with the new tax reform which means we may have more money in our pockets, meaning we have the capacity, now, to spend even more.
The story is even better overseas as GDP growth has gone from mixed throughout the world (disappointing in most countries outside of the U.S. up until recently) to synchronized expansion.
Breaking a streak
The Dow Jones Industrials Average and the S&P 500 snapped an impressive nine-quarter streak of gains. This has been the longest stretch of quarterly gains for the Dow for over two decades. Prior long streaks were broken in 1997 (an 11 quarter rally for the Dow). The S&P had a more recent impressive streak that also lasted nine quarters and was broken the first quarter of 2015. Other markets including bonds and international were also down this quarter. See the chart below for more details
The cash quandary
Have you noticed your money market or bank deposits rates spiking along with all of these rate hikes from the Federal Reserve? If not, you aren’t alone. Rates have continued to remain frustratingly low on our most liquid savings accounts. While the FED has raised rates by .25% on six separate occasions since 2015, deposit rates have not moved much. There are two likely reasons for this:
While the FED has raised short-term rates, long-term rates have not reacted as much. Since banks make money on the difference between the interest they charge on loans (which tend to be longer, think mortgages) and what they pay out in interest to their depositors, rates have stayed low for depositors. Banks have been unable to increase the rates they charge to loan individuals money and, therefore, they cannot raise the rates they pay on savings accounts.
Deposits at banks in small savings accounts are at an all-time high. This money tends to be steady even if the interest rate paid at the bank down the street is higher. So banks don’t have to raise the rates they pay to keep the assets. It is too much of a bother to close your account, withdraw the money, open a new account and deposit the money for a .1% boost in the interest rate.
Technology volatility
Technology stocks are catching headlines recently as Facebook had a breach of privacy and Apple and Alphabet suffer from fears of tightening regulation. The recent darlings of the stock market suffer because investors are calling in to question all of these technology companies that gather our personal data to enhance our user experience.
Midterm Elections
While it is still early in the year, midterm elections are starting to heat up. Democrats are out of power, and the midterm elections tend to favor the party that is out of power. Currently, we have a strong economy, and that is a factor that can influence whether voters go out to the polls and for whom they vote. A stable economy tends to encourage the status quo vote. The increased stock market volatility could favor the party that is out of power, though. While I’m not here to debate who will and won’t win, I am interested in how(or if) that could affect your portfolios. Generally, it isn’t a good idea to make changes within a portfolio based on politics. Politics are emotional, and it is rarely a good idea to mix these sensitive emotions with our investment dollars. We generally recommend not to make any major changes to a portfolio driven solely by an upcoming election.
In times of market distress including the areas outlined above that cause temporary volatility in markets, investors need to focus on the basics:
sticking to a diversified portfolio
maintaining appropriate cash reserves
rebalancing
If you ever have any questions on these or other topics don’t hesitate to reach out to us!
On behalf of everyone here at The Center,
Angela Palacios, CFP®, AIF®
Director of Investments
Financial Advisor
Angela Palacios, CFP®, AIF® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.
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