Today’s blog will attempt to give more color to the issues that have roiled the markets this week. Despite the recent volatility, please have a great weekend!
1. Some historical perspective to S&P 500 volatility in October.
Source: WSJ Daily Shot, As of 10/12/18
2. Is the FED chasing ghosts? By all indications, inflation remains benign and in control. We understand "normalization", but the concept of raising rates too far, too fast is what has the market spooked
Source: WSJ Daily Shot, As of 10/11/18
3. In a catch 22 of sorts, as the FED raises rates, our own government will have to pay a lot more in interest. The U.S. Government currently has ~$20 trillion in debt and this year's budget deficit will add almost $1 trillion more.
Source: WSJ Daily Shot, As of 10/12/18
4. How much interest? It is currently $1.5 billion a day. With the rate increases currently in place, this should rise to ~1.8 billion/day next year...
Source: WSJ Daily Shot, As of 10/12/18
5. This 1-year chart shows how rising rates can affect the price of existing bonds. High yield had been holding up well, but as a risk asset it tends to correlate with equities in times of market duress.
Source: WSJ Daily Shot, As of 10/10/18
6. It takes time for the effects of previous rate hikes to fully work their way into the economy. Home mortgage rates are now approaching 5%.
Source: WSJ Daily Shot, As of 10/12/18
7. Let's not forget QE reversal. The FED is selling bonds back into the market at a $600 billion/year rate, the ECB will end QE in December, and the Bank of Japan is slowing their QE. So who will buy all the world's debt?.. and at what price/yield?
.png?width=524&name=10.12%20chart%208%20(2).png)
Source: WSJ Daily Shot, As of 10/11/18
8. A nice recap of the tariffs so far. Note the escalation in the amounts. President Trump has further threatened to put a tariff on EVERY Chinese good. Since China cannot respond in kind, what other "weapons" will get introduced?
Source: WSJ Daily Shot; As of 10/12/18
9. Why is the tech/Communication Services sector getting hit hard? The 1st and 4th lines show the effects of the tariffs on these industries.
Source: WSJ Daily Shot, As of 10/12/18
10. So far the tariffs have had many unintended consequences. The USD has strengthened ~10% while the Chinese Yuan has depreciated 10%. Our goods are more expensive and theirs are now less expensive. This caused a record trade imbalance with China last month.
Source: WSJ Daily Shot, As of 10/11/18
11. This is how the world's 3rd largest economy is dealing with rising U.S. rates and the trade war...they are buying much less and at shorter durations.
Source: WSJ Daily Shot, As of 10/11/18
12. And finally, with energy prices steadily climbing, what would be the impact on GDP if oil were to rise to $100/barrel?
Source: WSJ Daily Shot, As of 10/12/18
Despite the hype from market media, we here at BCM want to assure you this week's stock market drop is considered normal market action.
Since the U.S. stock exchanges suffered of its worst losses since February, it is still imperative to address the current situation head-on by reading our "From the Desk of the PM" memo from BCM Portfolio Manager Dave Haviland.
Disclosure: The charts and info-graphics contained in this blog are typically based on data obtained from 3rd parties and are believed to be accurate. The commentary included is the opinion of the author and subject to change at any time. Any reference to specific securities or investments are for illustrative purposes only and are not intended as investment advice nor are a recommendation to take any action. Individual securities mentioned may be held in client accounts.
