“Shark Attack” Markets
We have picked this topic because, recently, I was at a gathering and somebody mentioned they were going to the beach. In the process someone said, “I just heard that a girl was swimming and got attacked by a shark and lost her leg” and everybody became very concerned and starting asking questions. Come to find out she was swimming late beyond sunset in the ocean. The point we are making is that the media did not say that she was swimming at dark during a normal shark feeding time. Obviously this is a very tragic event that occurred. However, the news didn’t investigate or look at the details as to what time of day she was swimming and how common this occurrence was. Do you increase your risk swimming at that time? So, the reason we picked this topic is we have “shark attack” like topics going on in the markets and it’s important to drill down on them to look at the details.
Weakness in the Economy?
We’ve got people talking about weakness in the economy, but what’s really going on there? With all the talks surrounding the trade wars and negative global slowdown it’s important that we reach out to our clients and viewers to say what reasons why we’re still bullish, not only on the economy, but the market itself. There are some reasons we are still bullish. Consumer confidence is strong which is important because 70% of our economy being consumer. Inflation is low as well as rates and are possibly going lower. We are at full employment. Housing prices are stable, earnings estimates are stable, and growth is moderating but still positive. Also, central banks around the world have begun to stimulate their economy. So, there’s a lot of good news that we’re not seeing in the media that we should be.
Weather the Storm
We had a lackluster jobs report on Friday as we all saw. The market didn’t react the way we thought it would as it clinched on to trade talks. One big contributor to this jobs number was the extreme weather in the Midwest. So, 8 states along the Mississippi had the longest stretch of flooding since the Great Flood of 1927. That’s a long stretch and caused the slowest pace of grain planting in U.S. history, since we’ve been recording it. The main contributors were corn and soybeans. We look at soybeans dealing with U.S. and China trade deal and it appeared as though we were going to have an oversupply of it the U.S. Now, it appears that we might even have the opposite happen. As these feed costs go up so will grocery bills. This will affect the consumer. We might not see that for a couple or few months but there will be a ripple effect of all of this. We have heard all about Chinese tariffs. It may very well be the bad weather that cause soybean prices to go up. However, these types of weather events don’t occur that often.
Let’s discuss how much jobs have been impacted in comparison with all the tariff talks. Initially seeing that figure of 75,000 jobs created Friday you have an immediate negative reaction. When you get a little more into the details you see that 88% of the GDP produced by the United States is in service companies like our own. 12% is government manufacturing retail. Well, guess what? That’s where the tariff hit. So, we’re focusing in on this job issue. That’s only 12% of it. The other 88% was fine. And oh, by the way, the unemployment rate, 3.6%, is still the best in 50 years.
Inverted Yield Curve
Often times you hear about an inverted yield. This occurs when the long end or 10-year rates are lower than the short end or 3-month rates. So, currently the 3-month Treasury bill is at 2.2%. The 10-year Treasury bill is at 2.09%. You heard that correctly. So, to give your money to the government for 3 years you will receive more than if you did for 10 years. That historically points to a recession coming because people feeling risk in the market. However, this time might be a little unique. We could see a lot of bad news is good news in that the fed is probably going to have to cut rates to keep the yield curve from inverting and to keep the economy out of recession. It’s not necessarily that U.S. economy is going into recession. It’s that we are in a global economy and global markets. So, when you hear about the 10-year Treasury being at 2.09% it feels like that’s extremely low. If you look at the world and even more in-depth, the next two largest advanced economies being Japan and Germany, we look good. The German 10-year yield is -0.28%. That means you give the German government your money and in 10 years they don’t only not pay you interest but they give you less money back. Japan is similar at -0.125%. So, if you are in those countries and you are worried about your growth because their growth is extremely slow. Are you going to invest money in your own government or invest it elsewhere? This is when those investors are investing in the U.S. which in turn is driving our yields down because of the high demand of our debt. So, we’ve seen a lot of global demand for our currency along with our dollar strengthening. Also, our large multinational companies and large companies doing very well. Falling yields typically indicate a recession but this time it’s sad to say but it appears as though the rest of the world need to get their act together. We are continuing to see strength in the U.S. economy.
Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
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