I would like to apologize for being a little late with my commentary this quarter, I had some family issues to attend to.
Where are we now? The first part of the year has been strong from an economic standpoint. The economy has been growing nicely and unemployment is at a 20 year low.
Also the recent tax reforms are having an immediate impact on corporate profits. With that said you would think that the market would be easily pushing higher. That has not been the case. Instead the first half of 2018 has been a bumpy road for a lot of stocks. As an example, five stocks alone have accounted for one half of the gains in the S& P 500 so far this year. Much of the anticipation of this strong economy was represented in the market last year leaving 2018 to find new reasons for strength in the markets. Also the US is one of the few markets around the world that was positive through the end of the 3rd quarter of this year.
Even with a strong economy the market is faced with some serious headwinds going forward. Those being tariffs (China), the threat of much higher interest rates warranted or not, and finally inflation. The market has been recently going through a phase of de-risking while looking at these threats on the horizon. Any of these headwinds can be resolved with the right decision. The threat of a full on trade war is and has been what I worry about the most given the headwinds that I am looking at right now.
What do we do from here? First of all I think that we need to understand that the markets have already factored in some of these threats and that’s why you have seen the volatility in the stock market recently. What they have not factored in is how high is the Federal Reserve going to take interest rates to combat inflation and will they overdo it and cause a slowdown in the economy, which will be reflected in the stock markets around the world.
Remember, we are now a global economy and what happens here will affect the rest of the world. The other part which I think is more immediate is how long will these tariffs last, and the threat of an all-out trade war. While our economy is currently much stronger than China’s and can take a little more pain than they can we cannot afford nor should we push this to the brink.
You can be assured as always that I am watching all of these events very closely and will react when it is necessary, keeping in mind that these types of pullbacks in the market are normal. Remember the market is a very emotional animal and decisions should be made on fundamentals not emotions.
I hope that this has been helpful.