I haven't posted my Friday Thoughts for a while. I' don't know about you, but it's been a busy summer. Now that the kids are starting back to school, maybe I'll find some time for writing. Sam Henry started 3K at St. James on Monday, but Clara doesn't start Wilson Hall kindergarten until the 27th. She's a little jealous of her brother right now!
One of the questions that I've been getting recently is about the seeming divergence of the economy and the stock markets. The economy seems to be doing well, yet the markets seem to be struggling this year and most investment accounts have seemed to go nowhere. How can that be?
I will agree that the US economy is doing well. Unemployment is low, economic activity is up, and businesses are doing well. Profits for the companies in the S&P 500 Index are at record highs. This is all good news and we should enjoy the good times and dance while the music is playing.
But, the stock market tends to be forward looking. Investors are pricing in future earnings, not today's earnings. The stock markets had their initial sell off earlier this year due to concerns about the impact of rising interest rates. The reality is that, due to the Great Recession, we have seen actions by the Federal Reserve over the last 8+ years that we've never seen before. They are now backing off of these unprecedented actions and investors have no idea what the impact will be.
With the huge amount of outstanding debt, there will be an impact from rising interest rates. With trillions of dollars in debt, every tick up in interest rates adds to the carrying cost to the debtor. While we are still at low rates, in comparison to rates 25 or 30 years ago, these higher carrying costs will hit company profits.
It does seem that easing of financial stimulus is impacting some overseas businesses already. We're seeing stocks in developing countries like China struggling recently. There are a lot of complicated reasons for this, in addition to rising interest rates. But I also think that we can't discount the impact of some of the rhetoric coming from President Trump and these countries reaction to it. The threats of tariffs are seemingly impacting manufacturing and sales overseas and helping the same here. This is not what the politicians in Washington or the media expected and it may not continue, but it I'm never shocked to see the pundits get the reality of middle America wrong.
I will say that I've been fearful of rising interest rates pushing us closer to a recession by next year. However, as companies have been releasing their quarterly results over the last month or so, I've begun to think that this may be further out than I initially thought. Profits are higher than I expected, and companies are beginning to talk about expansion, growth and spending. The tax cuts and reduced regulations are often being cited as reasons for the renewed optimism.
I still believe that a well diversified portfolio of US & International stocks and bonds is the best way to enjoy this economic good news while protecting from an eventual recession. I expect the markets to continue with the same volatility seen so far this year. We may even see another sell off. The reality is - that's pretty normal. You just need to be sure that your blend of those stocks and bonds has a risk profile that matches your expectations and comfort level.
If you're wondering if your portfolio really does match your comfort level, I have some great tools that can help. Feel free to give me a call or simply reply to the e-mail.
I hope that you have a great weekend. After this one, we only have one more weekend without college football!!