One factor of the October rout in the stock market has been rising interest rates. The market has concerns that the Federal Reserve could eventually overshoot (raise interest rates too high) and stifle economic growth. While an overshoot seems unlikely until sometime in 2020, investors tend to signal their displeasure early.
At this point in time the stimulus (tax cuts and increased spending) are working, providing the Federal Reserve cover for raising interest rates to a normal positioning after a very extended, nine-year period of exceedingly low rates. Normalization is the point at which rates do not help or hurt the economy. Once the next recession starts, the Federal Reserve wants to be in a position to lower rates to minimize the effects of any economy downturn. But to be able to lower rates, the Fed must raise rates first. If the Fed gets the timing or the end-point wrong, the stock market fears an early recession would be possible.
Rates are not the only concern of the stock market. The trade wars and tariffs with China, global instability, a bear market in some regions overseas spurred by slowing international economic growth, and a fear that US earnings have peaked — all are additional factors in the market’s new sense of worry. It is not unusual for market sentiment to swing from market exuberance to market anxiety in a short period of time. According to research firm Strategas, “Worse/better is mattering more than bad/good” right now. That means is doesn’t take much to tip the sentiment scale in either direction.
Ned Davis Research’s Global Recession Probability Model has a reading of 80% likelihood of a recession in the coming months. While the US is unlikely to import a recession from overseas, our economy can certainly be impacted by a decline in global demand for our goods and services resulting from a recession.
Any worry should be balanced against a very strong earnings season for US companies, a five-decade old low in the unemployment rate, benign inflation, and upbeat business and consumer sentiment – all of which should help to keep our economy and markets propped up in the near term.
Currently StrategicPoint is taking the stance that US economy will remain strong, or at least strong enough, to avoid an outright bear market. However, continued volatility is likely in the coming weeks as markets reset expectations and internalize the next steps in the economic cycle.
The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Betsey’s opinions and comments expressed on this site are her own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.