In last July’s newsletter I began writing about the possibility of an equity market correction. Looks like I was early by 6 months or so, but a correction has finally occurred, and it is still ongoing. Last month’s newsletter expressed that the only looming negative on the horizon was the possibility of the economy doing so well that interest rates would begin to rise and that this would cause equity markets some concern. Well, this is exactly what has happened in the last week. It is a classic example of too much good news can be perceived as “bad”.
During the last two weeks a barrage of economic date was released, including major reports such as fourth quarter domestic product (GDP), personal consumption expenditure (PCE) inflation, and the January employment situation report. Overall, the data deluge has signaled that the U.S. economy remains on stable footing. Signs of rising inflation were present in all three reports, which is the main factor behind stock and bond weakness over the past week. The worry is with a strong economy, and the new Federal Reserve (Fed) Chairman, Jerome Powell, that interest rates will rise enough to be a competitor to stocks and draw money out of equities into higher yielding bonds and fixed income.
LPL research believes that there is room for interest rates to rise and still have rising equity markets. LPL expects the Fed to raise interest rates three times this year but reminds investors that rates will be rising from historically low levels and that there is room for this rise before a negative effect will be felt on the economy. The tailwinds of tax reform, government spending and reduced regulation may support growth in personal consumption and business investment, enabling U.S. gross domestic product (GDP) growth to climb to 3.0% in 2018. LPL Research also believes global growth is also strong, projected to potentially rise 3.7%, as emerging markets continue to benefit from increased investment and Europe continues to improve.
So for now we wait. If there is further equity weakness, there may be opportunities for making select equity purchases for some. For some others, there may be fixed income opportunities down the road as interest rates slowly rise and bonds become cheaper in price and produce a higher yield in the interest they pay. As always, we are available to you to answer any investment questions you may have and know that in general, if we have diversified portfolios, staying the course is probably the right thing to do. – Mark
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Economic forecasts may not develop as predicted. Some of this research material has been prepared by LPL Financial. All indices are unmanaged and may not be invested into directly. Referenced material: LPL Research Weekly Market Commentary & LPL Research Weekly Economic Commentary, both dated February 5, 2018, along with John Lynch’s (LPL Chief Investment Strategist) letter to clients dated February 6, 2018. Approved Tracking #: 1-699786.