Market and Economic Commentary

by: Richard A. Anderson | Portfolio Analyst

This past quarter was filled with notable events and anniversaries. At the market’s close on August 22nd, the S&P 500 bull market became the longest ever. The S&P 500 managed to avoid a decline of 20% or more on a closing basis for 3,453 calendar days, a streak that began in March 2009 following the Great Recession. This current bull market surpassed the previous longest bull market that lasted from 1990 to 2000. Since that point, the S&P 500 has continued to reach new all-time highs. It’s ironic that we celebrated the longest running bull market nearly10-years removed from the collapse of Lehman Brothers on September 15, 2008 that shook the financial markets and preceded the Global Financial Crisis. It may feel like a lifetime ago, but we are not far removed from that historic event.

While the most unloved bull market of all-time continues to grind along, investors have increasingly been focusing on the issues that could potentially cause the markets to falter. There are three key issues that have become cornerstones in the “wall of worry” for investors in the most recent months: global trade, interest rates, and the upcoming midterm elections. Although each one of these concerns viewed in singularity would be categorized as noise, when viewed together they require careful attention.

Global trade tensions stole the spotlight earlier this year when the United States first started imposing tariffs on imports of solar panels, washing machines, steel, and aluminum. The tariffs were initially levied to protect domestic companies’ intellectual property and correct the trade imbalance with China, which has caused global trade tensions to rise as the United States and China exchanged retaliatory tariffs. While trade war fears have centered on the relations between the U.S. and China, trade tensions with European and North American allies have grown stronger.

The latest round of tariffs levied against China took effect on September 24. The tariffs on $200 billion of Chinese imports was a response to China’s tariffs imposed against the U.S. on agricultural imports, which was a response to U.S. tariffs on $50 billion of Chinese goods.

In addition to China, tensions with Turkey escalated quickly this quarter when the Turkish government failed to release imprisoned American Pastor Andrew Brunson. The U.S. responded by sanctioning two top Turkish government officials and doubling the existing steel and aluminum tariffs against Turkey. Turkey countered by slapping hefty tariffs on U.S. automobile, alcohol, and tobacco imports.

We do not expect trade tensions to dissipate in the short term, as this is an evolving stand-off. However, it is in all parties’ best interests to negotiate trade policies that are fair and beneficial to all parties involved.

As was widely expected, the Federal Reserve Open Market Committee (FOMC) announced another increase in the federal funds rate target range to 2.0%-2.25% following its September meeting. This marks the third rate hike of this year and eighth rate hike of this cycle. The Fed also raised expectations for a fourth rate hike in December and reiterated its stance of at least three rate increases in 2019. The Fed’s decision to raise interest rates is a sign of increased confidence in the U.S. economy. With low unemployment, strong economic growth, and benign inflation, the need for monetary policy stimulus may be waning.

Although a strengthening U.S. economy should be viewed as a positive sign, there is concern the Fed may be at risk of making a policy error. The Fed is intent on “normalizing” interest rates to a point where rates do not stimulate or hinder economic growth. The goal is to raise interest rates steadily to keep the economy from overheating but avoid raising interest rates so quickly that it spurs a recession. We believe it is worth monitoring the Fed’s actions, particularly if the economy performs better or worse than expectations.

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The third hot button issue that has garnered attention is the upcoming midterm elections. From a political perspective, the stakes are high. Control of Congress and influence over future policies are up for grabs as there is the potential for the Democratic Party to win control of one or both chambers of Congress and create a divided government.

From an investor’s perspective, the stakes are not as high. Historically, U.S. markets have tended to be more volatile and returns more muted in the months leading up to midterm elections. However, in the weeks leading up to the election markets tend to rally as outcomes are easier to predict. This supports the idea that markets don’t like uncertainty.

History suggests that politics are immaterial to the capital markets. No matter which political party is in office or controls Congress, the long-term drivers of stock returns are expectations of future cash flows. Therefore, we believe it is prudent to look past any short-term volatility associated with the political environment and focus on the long-term wealth creation of investing in the capital markets.