The following article was written on 10/08. However, at the writing of this new introduction the US stock markets have sold off tremendously this week. Most are still pointing to slowing growth in the economy, rising bonds rates, and increasing trade tensions. In short, your advisors at Sound are attentive, watchful, and following our Rules Based models that are built for such times as these. Please call us if you have questions regarding your account.
The big story from last week, October 1-5, was the breakout in interest rates. Market commentary would have you believe that interest rates are moving up because of economic growth. Economic growth has been robust since 2016 and interest rates have moved up in accordance. However, we believe that growth and inflation expectations may start to slow going forward due to high valuations, a tightening Federal Reserve, and higher interest rates. Furthermore, we have several potential negative catalysts that we need to be mindful of going forward. Trade wars are our largest concern, as JP Morgan stated last week when referencing that a full scale trade war between the US and China was now their base case. If trade war tensions continue to heat up, global growth could slow rapidly and the markets could respond in a negative fashion.
We had a busy week economically, where ISM reports showed continued expansion in both manufacturing and non-manufacturing activity. Furthermore, the ADP report showed private payrolls increasing by 230,000 jobs in September. The Bureau of Labor Statistics reported only 134,000 jobs being created in the month of September, but the unemployment rate dropped to 3.7 percent.
Interest rates rallied over 5 percent over the course of the past week, causing stock and bond markets to drop considerably. Trade war concerns likely perpetuated this drop as we saw international and emerging markets retreat as well. Despite the pull back in risk assets, intermarket prices and market internals remain constructive for a continued up trend. However, we are concerned that a continued upward move in interest rates and trade war tensions could potentially be negative catalysts.
We believe that the data shows the US economy to continue to grow, though slowing. Growth is typically a good sign, as you can imagine. Though we are mindful of that slowing down. At Sound, we will continue to watch the data, follow our Rules Based approach, and serve our clients with excellence.
(From Clint Sorenson and the investment team at Wealthshield, Sound Financial’s OCIO)