While market volatility persists, economic indicators point to a robust economy. Get all the details by reading on…
Insights from the September Fed Minutes – for market and Fed watchers who were expecting revelations and/or references to the recent market volatility in the Fed minutes, they were sorely disappointed – and that’s a good thing. In our view, the straightforward and data-driven comments by the Fed reinforce that the U.S.’s central bank is doing what it’s supposed to – making decisions based on data-dependent factors. The Fed cannot and should not be expected to respond to market volatility or political pressure for easy money, and the notion that the Fed should be clear about defining the ‘neutral rate’ is misguided, in our view. Instead of addressing market volatility, the Fed acknowledged leveraged loans, tariffs, and strains in the Emerging Markets, which in our view are the actual global economic data that could have meaningful impact on the life of the current expansion. In short and in our view, the Fed is responding to actual hard data and gradually increasing interest rates in response. It’s difficult to fault the central bank for following its mandate.1
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How Long Can the Longest Bull Last?
Indeed, we’re now in the longest bull market ever recorded in history! For those who fear what goes up must come down, this is arguably a worrisome situation, especially with recent volatility.
Still, we see a case for optimism. Learn more with our just-release Market Strategy Report.
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Market Volatility Persists as the Economy Strengthens – U.S. and global markets continue in a volatile streak, while economic data continues to suggest a U.S. economy in strong shape. Ex-Fed chairman Alan Greenspan commented this week that this is the “tightest labor market [he’s] ever seen,” which followed a report this week that American employers had more than seven million unfilled jobs for the first time on record. Just in August, available jobs outnumbered jobless Americans actively looking for work by 902,000, the biggest gap on record. Such tightness in the labor market could ultimately flow through into higher wages, which in turn could impact inflation readings. Meanwhile, the World Economic Forum deemed the U.S. the most competitive country in the world, regaining the No. 1 spot for the first time since 2008. Rounding out the list for the top five competitive countries were Singapore, Germany, Switzerland, and Japan.3
Emerging Market Selloff: Different this Time? Equity market sell-offs in the Emerging Markets are nothing new – Emerging economies by definition have less sophisticated capital markets, capital inflows that are far from consistent and reliable, and currencies that often fluctuate wildly based on global financial conditions and in many cases policy decisions in the U.S. that may affect the U.S. dollar. The biggest Emerging Market sell-offs over the last decade or so came in 2008 (financial crisis), 2013 (spike in Treasury yields fueled by the “taper tantrum”), and 2015 (concerns over Chinese growth). This time around, Emerging Markets seem to be feeling pressure from rising interest rates in the U.S., and continued uncertainty surrounding the trade war. Given that Emerging Markets carry heavy loads of dollar-denominated debt, rising interest rates and a stronger dollar can tighten financial conditions considerably. Some analysts are warning that this Emerging Markets sell-off is different than others, but in our view, it has many of the markings of the previous pullbacks and is being caused by a lot of the same reasons.4
U.S. Budget Deficit Soars – According to the Congressional Budget Office, the U.S. government ran its largest budget deficit in six years, which is not what one would expect during a time of such robust economic growth. Fiscal policy plays an important if not central role in fueling the deficit, as tax cuts have restrained government revenue while the administration has largely not changed spending patterns. The deficit hit $779 billion in the fiscal year that ended Sept. 30, which is 17% higher than the $666 billion deficit the government ran in fiscal 2017, according to the Treasury Department. For the fiscal year that ends September 30, 2019, the budget deficit is approaching $1 trillion. Historically speaking and in terms of logical economic assumptions, deficits usually shrink during economic booms, since strong growth should lead to higher tax revenue as corporate earnings, household income, and capital gains all rise. In this case, however, growth has not quite made up for the size of the tax cut while spending has not materially shifted downward. The last time the unemployment rate was below 4%, in 2000, the U.S. ran a budget surplus of 2.3% of GDP – today, the government is running a deficit of 3.9% of GDP. In 1969, which was the last time the unemployment rate dipped to 3.7%, the U.S. ran a budget surplus equal to 0.3% of GDP.5
Want to learn more about the ever-changing market landscape and key economic factors that influence it?
Look no further than our Just-Released Market Strategy Report.6
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