Let me start by saying that I have no clue what is going to happen in the stock market in the next 12 to 18 months, what I do know are several of the factors that have a say in what happens.
If you guessed that at least one of those factors has to do with President Trump, then you’re right.
Trade
The big elephant in the room. Honestly, I have no idea how this is going to pan out. Obviously, it behooves both parties to get this rectified as soon as possible, but it makes sense for China to hold out until the 2020 elections.
If they make a deal now, the US has more leverage at the moment and will probably be on the winning side of things.
If they wait until 2020, they have a chance of getting a Democratic president elected, and more than likely, they’ll reverse course on trade.
I think the odds increase that a Democratic president will win because if a trade deal isn’t reached, the market will negatively react and if the market tanks while Trump is president, he’ll be in trouble.
The US also decided to slap tariffs on European goods. This matters because if a deal is made with Europe, that gives the US that much more leverage. They won’t need China as much, and it’s clear that China needs us. We’ll see what happens.
Interest Rates
You may have caught wind of the most recent jobs report. We added over 200,000 jobs last month, which was much stronger than expected.
You’d think that kind of surprise would be good for the market, wouldn’t you? Unfortunately, the strong jobs report signaled a stronger economy than previously forecasted.
A stronger economy gives the FED less of a reason to cut rates this month. Where it stands now, I don’t know what they will do at the next meeting.
I was certain they would cut, but that was before the jobs number. I think it will benefit us down the road if they don’t. The reasons I think that have been explained before, but I’ll give you a synopsis real quick.
Typically, in the normal business cycle, rates will start [generally] low and consistently rise in tandem with economic expansion. Once the expansion peaks, the FED will cut rates to promote borrowing, which translates into spending.
Here’s the kicker. The prime rate (the rate the FED controls and the rate that affects all other rates) needs to be at a certain level when the FED cuts. If the prime rate isn’t high enough, then the FED won’t be able to cut enough to stimulate the economy.
What does this mean?
The current economic and political environment in the US is like nothing we’ve ever seen before. Our respective parties are at each other’s throats, which doesn’t make cooperation easy.
The unemployment rate is as low as it’s been in 50 years, inflation is crawling, rates are still ridiculously low, and the market is making new highs.
The FEDs impetus for raising or not raising rates is the level of inflation. It’s lower than their 2% target so they took their foot off the gas.
We are at the end of an expansion, which means a recession is most likely on its way, if not in the works already.
If you have less than 15 years until retirement and reallocate your accounts to be a little more conservative than usual. If you have over 15 years until retirement, I wouldn’t make any adjustments (allocate according to risk tolerance, time horizon, and goals).
Keep in mind that if you shift to more conservative and the market continues to rise, you’ll lose out on some gains, but if the market tanks, that conservative tilt should help minimize the damage.
My name is Jacob Sensiba and I am a Financial Advisor. My areas of expertise include, but are not limited to, retirement planning, budgets, and wealth management. Please feel free to contact me at: jacob@crgfinancialservices.com