Market Update: A Formal Correction
By Keith Klien
Well, it happened: the first formal market correction since the recession of 08-09. Mathematically, we have been due. Though the circumstances are fairly different from the recession, there are some things to be thinking about for both the short and long term.
1. The prognosticators have been calling for rising interest rates for some time now. Now it appears likely that by the end of the year or, at the very latest, the first part of next year, the Federal Reserve will raise rates .25% on short-term funds.
For most people, this will be a non-event because longer term rates are not likely to move up much, if at all. However, several days of high volatility immediately before and after the rate hike announcement are likely. We do not think substantially higher interest rates are forthcoming in the foreseeable future.
2. The decline in oil prices has led to a deflationary environment in our commodities markets. That includes gold, silver, industrial metals, precious metals, and many agricultural commodities. Why? In the case of oil, the U.S. has now become the swing supplier for the world, is the largest consumer of energy, and is now one of, if not the largest producer of energy. The U.S. controls the price of oil. As a free market, when the oil prices start to approach $70-$75 per barrel, we start producing more, and that forces the price back down into the $50-$60 range…a dramatic reduction in prices that were over $100 a year ago. While in the short term this has proven to be rather destructive for parts of our economy and certain earnings projections, in the long run, as the largest consumer of energy in the world, it is great for the United States. A simple example is how much it costs you to fill your tank with gasoline.
For those of us who are old enough to remember when, think of this as the reverse of what happened in the 70s. While gas and oil prices were quadrupling, we were waiting in line at the pump and actually not able to fill our cars’ tanks because gas stations were running out of fuel. The economy was in shambles and things were horrible. I believe the reverse is true and that these lower oil prices are setting the stage for very good economic growth in the United States in the relatively near-term and going forward.
Many of our largest trading partners, developed Europe (Germany, France, England, the Netherlands, etc.) are net importers of energy. So, lower cost of energy is good for them, it’s good for the Chinese, Indian, and most of our friends’ markets. It’s bad for some enemies, meaning many of the Arab countries, Russia, and Venezuela. Unfortunately, Australia and Canada also get swept up in the fact that it will make their economies more difficult.
3. Globally, central banks continue to print money and put pressure on interest rates to remain low. Twenty of 22 major central banks are in relaxed or free-flow mode with their monetary policies. Since even modestly rising interest rates will push up the value of our currency, we believe the U.S. dollar will likely remain strong for the foreseeable future against all other major currencies. That has good and bad aspects to it and I would like to chat with you individually about some very specific investment strategies capitalizing on a strong dollar that might be appropriate for your portfolio.
The net, we believe, will be very positive for the U.S. economy, positive for corporate profitability, and therefore positive for the stock market in the longer run. We do not see a dramatic increase in interest rates, which makes it difficult for savers and those trying to generate income from their portfolios.
If you are concerned about your need for income and we haven’t discussed your options recently, we need to talk. I would like to discuss with everyone how these major economic elements impact your portfolios going forward. Please call my office.