Except for a “blip” at the beginning of the year, the stock market, especially the U.S. stock market, has continued to recover from the punishing declines of 2000 and 2008.
The U.S. economy has shown some wonderfully progressive momentum in its recovery, in part from the recent tax cuts and increased federal spending. The economy is growing while inflation and interest rates remain low. The U.S. GDP growth expectation for 2018 is 4.1%.
As we reap the benefits, the question on everyone’s mind is, “How long will it continue?”
Today, emerging technologies have had a strong influence on our current low level of inflation, making goods and services more affordable and accessible worldwide. As the growth of technology expands, it will continue to make a positive impact on our economy as demand for goods and services are being met at a lower cost.
At the Sept 26th FOMC meeting, the Federal Reserve increased short-term interest rates by 0.25%. This increase was consistent with the Fed’s policy and we might see another rate hike in December. The Fed increases short-term rates, which increases borrowing costs, to slow an “over-heating” economy and lowers them to stimulate a lagging economy. When the Fed increases the short-term rates to where they meet long-term rates, a flat yield curve, which has been a strong predictor of coming economic and market downturns.
In addition to recent short-term interest rate increases, the 30-year Treasury, has increased from 2.8% in January to 3.2% in September.
If long- and short-term rates continue to increase simultaneously, it could postpone the next economic downturn.
There is no question a correction, or a cyclical downturn, will happen at some point, the important question is when and how severe this one will be?
We don’t believe that we are in a similar situation to where we were back in early 2000 and 2008. We don’t have something looming like the tech bubble of the 90s or the huge unsupported debt issues and real estate bubble of 2008. It doesn’t appear to us, that a recession is immanent.
We understand that you, as an investor, want to avoid potential downturns while taking full advantage of opportunities associated with strong economic growth. As such, we will continue our due diligence in keeping a close eye on interest rates and other possible indicators to advise accordingly.
“The stock market is a device for transferring money from the impatient to the patient”
- Warren Buffett