After a historically calm September in which the S&P 500 didn’t drop 1% on a single day for the entire month, the S&P 500 dropped more than 1% on consecutive days to start the month of October. This certainly wasn’t the start of the fourth quarter investors were looking for. In fact, this is the first time in history the S&P 500 fell at least 1% on consecutive days to start the fourth quarter and represented the worst start to the fourth quarter since 2009.
Stop me if you have heard this before. Uncertainty regarding trade and monetary policy are weighing on markets and the economy. These issues have held investors hostage for a number of quarters, and just when we think a resolution is within reach, there is a new disruption that serves to further increase uncertainty. I’ll address each one of these issues individually and explore how both are impacting markets and the economy.
The attacks on Saudi Arabian state-owned oil facilities that sent oil prices surging were the story for financial markets for the first half of last week, until the Fed announced it was once again cutting interest rates.
On Saturday, September 14, coordinated drone strikes on two Saudi Arabian state-owned oil facilities disrupted more than half of the country’s oil production, or 5.7 million barrels a day. Saudi Arabia’s Interior Ministry confirmed the drone strikes on the oil-processing facility in Abqaiq and an oil field in Khurais, which are both owned by state-owned Saudi Aramco. The facility in Abqaiq is both Saudi Aramco’s largest oil processing facility and the largest crude oil stabilization plant in the world.
Inflation has been a popular topic of late.
In his press conference to announce the Fed’s decision to cut interest rates following its July meeting, Fed Chair Powell cited “muted inflation pressures” as justification for action.
However, retaliatory tariffs between the U.S. and China have raised concerns this could spark inflationary pressures as consumers are forced to pay higher prices.
When Congress passed the Federal Reserve Act in 1913, it established the Federal Reserve System with the initial objective of supporting a fragile banking system. In the over 100 years since it was first established, the responsibilities of the Federal Reserve System (or the Fed for short) have expanded to include several broader responsibilities, such as fostering a sound banking system and a healthy economy. One thing that hasn’t changed is the Fed is an independent government agency that is accountable to the public and Congress to act as the Central Bank of the United States.
I am always hesitant when writing about large market drops. It’s a delicate line to walk. In writing something that will calm your nerves and add perspective to what’s happening in the markets, am I calling attention to something that you may not have been aware of? Now that a few days have passed and the markets have rebounded a little, I think it’s safe to address the events that unfolded last week.
Earlier this month, President Trump announced the United States will impose a new 10% tariff on $300 billion worth of goods imported from China. The new tariffs, which are set to take effect on September 1st, could have a more direct impact on U.S. consumers because the list of target goods include clothes, toys, cell phones, electronics, and other retail items. Up until this point, tariffs levied by the U.S. against Chinese imports have targeted goods that are used mainly as inputs in the manufacturing process, such as steel and aluminum. Those tariffs affected the costs for U.S. companies, but those increases were not necessarily passed through to the consumer. These newest tariffs could hurt consumer’s wallets.
In a widely anticipated, yet highly debated, move, the Federal Reserve (Fed) announced this past Wednesday it is cutting interest rates. The Fed lowered the federal funds target rate range by 0.25%, from 2.25%-2.50% to 2.25%-2.00%. This marks the first time the Fed has cut interest rates since 2008. So, why was the Fed’s decision so controversial?
It’s often said there are two things that are guaranteed in life: death and taxes. While there have been many who have expanded this list to include other certainties life has to offer, one that often doesn’t make the list is recessions. As much as we hope and plead that economic expansions will last forever, we know the inevitable truth. The economy is cyclical. It goes through periods of expansion and contraction. Recessions happen as a result.
Markets had a great first half of the year. Major stock indexes, including the S&P 500, reached new highs. However, global economic growth is slowing. Investor concerns about a recession have increased and unresolved trade negotiations with China have created even more uncertainty. Slowing economic growth, rising recession risk, and tariff uncertainty doesn’t sound like a recipe for a stock and bond rally, does it? So, what has spurred stocks and bonds higher?
Things can change quickly. If I was writing this post one month ago, it would be a completely different topic with a much different tone.
Following four straight months of positive performance to start the year, the S&P 500 posted a -6.35% return in May. This was the third time in eight months the S&P 500 had a monthly loss of more than 6%. Fears of a full-blown trade war were reemerging as trade negotiations with China soured and it looked like fresh tariffs would be imposed against Mexico. The trade wars would put downward pressure on an already slowing global economy, putting even more pressure on central banks to ease monetary policy.
As we highlighted in our post “Anatomy of the U.S. Economy,” consumer spending accounts for nearly 70% of U.S. gross domestic product (GDP). Current consumer spending, as well as future spending, is highly influenced by consumer expectations for the economy.
The U.S. economy is on the verge of breaking the record for the longest stretch of economic expansion in U.S. history. Since the U.S. economy hit bottom in June 2009 following the Great Recession, it has been on a slow and steady recovery that has it on the brink of surpassing the expansion from March 1991 to March 2001 as the longest in U.S. history.
The American Dream consists of baseball, warm apple pies, and homeownership. As I near the end of my mid-twenties, many of my peers are trying to realize the American Dream of purchasing their perfect starter home. Over the years, my cohorts have casually been looking to find the deal of the century in a move-in-ready starter home at a low price. But even the starter homes that require major renovations and improvements have come with lofty price tags.
For the past 18 months, two hot button issues for investors have been the Fed and trade negotiations between the U.S. and China. These two issues were the catalysts for two market corrections in 2018, the latter of which nearly approached bear market territory. However, for the first five months of this year fears of a Fed misstep were alleviated and reported positive progress towards a trade deal between the U.S. and China spurred markets to new all-time highs.
When the calendar turned from March 31st to April 1st, the U.S. economic expansion turned 117 months old. Should the expansion continue through July, it would become the longest economic expansion in U.S. history. Given that the U.S. economic expansion is starting to show signs of its age, many have been questioning how much longer until the next recession.
It’s been an eventful few months. After posting its worst quarterly return since the fourth quarter of 2008, the S&P 500 rebounded strongly in the first quarter of 2019 to post its best quarterly return since the third quarter of 2009. The S&P 500 has now recovered much of its fourth quarter losses as oversold signals have faded and investor optimism has been buoyed by a favorable shift in monetary policy by the U.S. Federal Reserve.
The Federal Reserve held their March meeting this past week and indicated no more interest rate hikes will be coming in 2019 as a result of concerns over slower growth and the potential for a bump in the unemployment rate. This is a significant shift from three months ago when the Federal Reserve announced two interest rate hikes would be appropriate for 2019.
In closing 2018, the S&P 500 posted its worst December since 1931, during the Great Depression, and its worst quarter since 2008, during the Great Recession. The good news is we didn’t have to wait long for the bounce back. To start 2019, the S&P 500 posted its best January since 1987. As of Friday’s market close, the S&P 500 is 5.0% below its high on September 21, 2018, but is 19.0% above its low on December 26, 2018.