First, I really do not like sending out these types of emails. I do them when I think it is necessary. Hearing from me twice a week is usually more than enough for most people and you already heard from me this morning. The times I have sent them out in the past have been occasions such as Brexit, the Presidential Election and the Equifax Breach. I thought this week’s and especially today’s market pullback warranted a quick note from me.
I shared earlier this week in a client-only piece how we are now enjoying the longest streak without a 5% pullback in the market. I guess I jinxed it. Because it has been so long I wanted to touch base on a few items.
Today started off with good news. More jobs were created than expected. Also, wages rose in accordance with estimations. Wage growth is a good thing as well as job creation. Unfortunately, the market is reacting as if it were too good of a thing for fear of inflation. The market is like Goldilocks – not too hot and not too cold. There is nervousness right now interest rates will rise faster than expected and the Fed will increase rates four times this year instead of three, which has been the consensus expectation (I’ve always thought four was more likely after the tax cut).
To add to the mix, a couple of heavyweights on the market, Exxon and Google (Alphabet) reported earnings that were not up to the analysts’ expectations. While most companies have had solid earnings the results of these two helped give an excuse for some profit-taking to occur.
So, why are rising interest rates an issue? Well, I touched on it earlier this week a bit, but it is probably worth a refresher. Remember, bond prices and yields are like a seesaw. As one end moves up the other goes down. Right now there is not a lot of demand for US bonds. Both the 10-year and 30-year bonds continue to have yields rise, which means their respective price continues to drop. Bond buyers are waiting until they have a better idea what the future yields will look like. I mean, would you buy a bond paying 2.75% if you think rates are going to go up and could pay you 3.75% instead?
Rising rates are also an issue because it means paying on debt becomes more expensive. Not only does the US have to pay on debt but corporations do too. Just like interest on your home mortgage, the more you are paying in interest the less that is going toward something more productive, like increasing your ownership equity. So, higher interest rates can result in corporations spending more on debt payment than things like hiring, wages, and R&D.
Days like today are not fun for anyone. I think most of us remember the chaos of the mortgage meltdown in 2008. I learned a few key things back. First, it is time to take a look at your overall picture to make sure nothing is too out of whack. This is where having your own Investment Policy Statement is critical. Two, don’t turn on things like CNBC. They will be rolling out all the perma-bears. Please remember CNBC is an entertainment channel. Finally, make sure you are hearing from your advisor. You should NOT be reaching out to them. It should be coming from them and NEVER accept laziness like them simply forwarding you some canned investment commentary they pulled off the web. My clients already heard from me earlier today. Hopefully your advisor has done the same. If not, well, I’m sure their value is elsewhere.
Finally, in the words of Benjamin Graham, a mentor of Warren Buffett – “-To be an investor you must believe in a better tomorrow.” Enjoy the weekend!