As the 2nd quarter of 2018 closes, we take a look back at the economy and markets to assess what has happened and make educated predictions for how things might shake out looking forward. The S&P 500 is up 4.8% this year following a strong three-month performance, while the Dow Jones Industrial Average has fallen 2.25% in the same time frame. The disparity in these numbers can be attributed (mostly) to the movement in the tech sector with Amazon carrying the market on its shoulders. We’ve also seen some of the largest one-day changes in the market, and while some of this can be attributed to inflation, the volatility is still something we haven’t seen in the past 9 years and it’s time to get used to this new reality.
There are many different factors contributing to the turbulence in the market over the 2nd quarter. Big announcements, some substantial and some not, influenced sudden market moves and created kinks that are still working themselves out today. From our perspective, there are three major factors that are affecting market returns: Rising interest rates, Chinese/Canadian trade war, and new innovations in the technology sector.
Investors are seeing the effects of rising interest rates in the form of mortgages and real estate most dominantly. Not only have loan rates risen, sectors dependent on leverage took a big hit earlier in the year. This trend shouldn’t be slowing down anytime soon with analysts assuming 2-4 interest rate hikes in 2019 and again in 2020. This will prove to be important in loan rates (car, home, credit) but not as much in the market since investors are anticipating these tweaks and the rising rates will be priced into the market already. For these reasons, we’re seeing a positive tilt towards real estate in investors’ portfolios that want less correlation and higher yield.
The contest of who is most powerful between the United States and China has caused some heads to turn as no one knows what statements made by either countries leader can be determined as accurate. One thing is for sure, trade war is bad for markets. Capitalism can be buried down to the idea that price is a byproduct of supply and demand. Extra charges such as Tariffs completely contradict the basis of Capitalism and, therefore, will push the markets one way or another based on the latest tariffs. To give you an idea of the shear size, China imported $506 Billion dollars into the US last year which amounted to a $13.5 Billion tariff assessed by the US. Changing these numbers will vastly change the country’s bottom line along with the companies supplying those goods. Until tariffs are figured out, companies are hung out to dry without knowing the true price of goods and services around the world.
Lastly, we continue to see innovation at absurd rates. Big Tech is taking over entire industries via acquisition that is changing the landscape of the economy in minutes…literally. We see this all over the globe but most noticeably in the US. The largest car company in the world right now is Tesla (established 2003), the largest retailer is Amazon (1994) and the largest media company is Netflix (1997). We can compare that to Ford (1903), Disney (1923), and Walmart (1962). One thing is clear: there are new sheriffs in town and they aren’t backing down. Most recently, Amazon announced its entrance into the Pharmacy world by purchasing PillPack – an online Pharmacy store that ships medications. This caused Amazon to spike nearly 3%, or add $2.5 Billion in value while Walgreens, CVS, and Rite Aid lost $15 Billion collectively. This all coming in one day, from one decision, by one company. This trend is only just beginning as giants in the industry realize they can expand outward to other industries with little to no backlash.
Our outlook remains positive on the markets altogether. The performance this year has been stagnant, but we see no reason to make major allocation changes at the moment. We still have faith that stocks will outperform bonds in the short-term, which leads to some portfolio changes lowering long-term bond holdings and increasing Real Estate exposure. This will give a less correlated asset class some room to recover, while maintaining current stock exposure. Depending on how you look at 2015 and 2018 so far, we’ve essentially had a upwards stock market run over the last 9 years. While this can be worrisome (we’re due for a meltdown, says certain analysts) we don’t have the numbers or indications to prove that just yet. What we do have, as listed above, are companies earning profits in new ways and workers becoming more and more efficient which ultimately boosts GDP and the economy.
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