Unrest in Russia
There was an effective attempted coup in Russia over the weekend with the Wagner group. At one point, they were marching on Moscow. However, when the markets opened today, this topic seemed quelled entirely. What it did, however, was create more questions. This war between Russia and Ukraine has been in a stalemate for over a year now, and much of the uncertainty around it seems to have been removed. The markets don’t react to any news one way or the other, but one question this raises is if there was unrest in Russia, how would that impact our markets here in the U.S.? In February 2022, when the war in Ukraine started, our U.S. oil market spiked to nearly $120 a barrel. That’s the market’s perceived risk if Russian oil were ever taken off the market. We thought, at that time, that Russian oil would be removed, so we limited oil export to Europe and the U.S. through sanctions, but we didn’t stop it. It’s just moved to where it’s going, so Russian oil is still pumping. If you ever wanted to produce unrest within Russia, that’s precisely where you’d want to go. The power base is in the money being driven from all production oil sales globally. If we were to see any continued unrest, it would likely happen in the oil market exclusively first. That’s where the protection is and where the prices will be hit. Russia as an economy is extremely small and has almost no impact on us. It’s a large energy country, so there will be no hit market-wide; only in the energy sector could it make an impact.
Historical Rate Hikes
With the Fed pausing its rate hiking in June, we wanted to review what that historically means for the stock market and interest rates. Looking back in history, over the last 35 years, there have been five monetary policy periods when the Fed paused after a major rate hiking cycle like we’re currently in. During these periods, it took four to fifteen months before the Fed started to cut rates, with the average pause lasting just shy of seven months. As expected, the Fed paused its rate hiking cycle after fifteen consecutive months of tightening. What happens to the market and interest rates? While the number of occurrences is limited, stocks have done relatively well after a Fed pause following a major rate hiking cycle. The S&P 500 traded higher over the following twelve months after four of the last five pauses. The average twelve-month index return for all five periods was 16.4%. The outlier year was the pause in May of 2000. Interest rates have historically declined after a Fed pause, which is good news. The ten-year treasury yield also declined after all five Fed pauses, falling by an average of 13.7% over the following twelve months. So, history says a Fed pause is good for the markets and can be good for interest rates falling. We’ll see what happens here, but history says it’s a good thing.
We expect to see a Supreme Court decision that will impact student loans in the upcoming weeks. No matter this court decision, student loans are set to start picking up interest again in September, with the first payments beginning in October. This would be the first time people have been forced to pay their student loans since March 2020. Some college kids are two years out of college and have never paid student loans. This is going to have a significant impact on consumer discretionary spending. On average, student loan payments are $383 a month. For people between the ages of 18 and 29, student loans account for nearly a third of their total debt. Out of all of the debt someone might have, including auto loans, mortgages, credit cards, and more, student loans were a third of it all. The U.S. Supreme Court must decide if they want to uphold the plan to forgive $10,000-$20,000 of the student loan forgiveness, depending on your income. If they choose to enforce that, it will result in a $400 billion expense because about 40 million people will be eligible for this program. Sixteen million people had already applied when it became big news and was approved. We expect that to go into effect quickly if the Supreme Court rules to go that way. However, suppose they say that’s not how they want to go. In that case, we expect President Biden to roll out a new income-driven plan immediately after that decision. On this plan, based on your income, you will pay 5-10% back on your student loans each year. After 20 years, the balance that is left will be forgiven. This could result in higher costs because if you pay off $10,000-$20,000 and still have $100,000, you still have that big bill. If you’re paying interest back every year and you still have a large balance at the end of 20 years, all that’s left will be forgiven. That could be a more significant expense. When the Supreme Court announces its ruling, we can go more in-depth on which route that’ll take. The important thing to note is that student loan payments will pick up again with interest in September, with payments starting in October. This will be the first time making these payments for many who lack discretionary spending. This could impact their daily lives as well as the markets.
Fi Plan Partners is an independent investment firm in Birmingham, AL, with a team of professionals serving clients across the nation through financial planning, wealth management and business consulting. The team at Fi Plan Partners creates strategies in the best interest of their clients using fee based 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.
Economic forecasts set forth in this presentation may not develop as predicted.
No strategy can ensure success or protect against a loss.
Stock investing involves risk including potential loss of principal.
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