Money Advice

The two big fears concerning Wall Street right now

Posted by The Simply Money Advisors Team on Aug 27, 2018 5:12:00 PM

Large U.S. stocks closed at a record high on Friday, finally recovering from the correction (as defined by a drop of 10% or more) that began in January.

This bull market began on March 9, 2009, and it’s now the longest in history for large-cap stocks. While many investors are worried about this, bull markets do not die of old age. What has historically killed stock rallies are recessions.

Fortunately, the recession risk over the next 6 to 9 months is currently low, but we know the data can change at any moment. That’s why we at Simply Money Advisors constantly monitor recession risk by carefully analyzing leading economic indicators, which are data that moves before the broad economy.

One concern many people have is that the Federal Reserve, our nation’s central bank, will be too aggressive in raising short-term interest rates. If interest rates are too high, it will make it more expensive for people to borrow money and spend that money. This matters because consumer spending makes up about 70% of the U.S. economy.

Currently, interest rates are still very low by historical standards, but we are closely watching the interest rate environment. Federal Reserve Chair Powell gave an important speech in Jackson Hole, Wyoming, last week about the Federal Reserve's views, and here are the key takeaways: The Federal Reserve believes the U.S. economy is very healthy, a rate hike at its September 26 meeting is very likely (95% likely, according to Bloomberg), and rate hikes beyond that (notably in December) are up for debate.

Another fear people have is that the trade spat with China will hurt the U.S. economy. The longer this goes on, the more likely this will indeed occur. There were talks last week between low-level US and Chinese officials, but there was no progress.

In fact, both China and the U.S. put into effect last week tariffs on $16 billion of goods. The U.S. appears ready to impose tariffs on $200 billion of goods in September or October unless there is a breakthrough. We believe there will eventually be a trade deal, but it may not happen for a few months.

On a positive note regarding trade, the U.S. and Mexico are very close to a NAFTA (North American Free Trade Agreement) deal. Canada will likely rejoin the talks after a deal is announced. With a light economic calendar this week, trade talks and interest rates will be the focus for Wall Street.

The Simply Money Point

Some volatility should be expected as the Federal Reserve continues to raise short-term interest rates, trade talks with China sputter, and U.S. political tension climbs. And while low recession risk and increasing corporate profits should benefit stocks in the months ahead, this may be a good time to make sure you have a diversified investment mix that’s aligned with the risk you’re comfortable taking.

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Topics: Economics


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