The markets have continued an impressive recovery from the lows at the beginning of the year and in the aftermath of BREXIT. The markets have drifted higher in the third quarter climbing a “Wall of Worry.” This commonly used Wall Street term describes a market that appreciates in the face of a lot of questions and headwinds. With the Federal Reserve still holding short term rates very low, investors have been buying higher quality stocks with dividends to replace the loss of yield on bonds. We believe this theme will continue for the next couple of quarters as the Federal Reserve tries to evaluate mixed economic reports and employ a cautious strategy to interest rates.
In contrast to our improving domestic economy, international economies are still searching for a sign of improvement. International economic numbers are showing little signs of recovery even in a negative interest rate environment. There is growing concern regarding the strength of the European Union agreements, as Britain very publicly voted to leave the Union in late June. In response to the struggling international markets, most experts are forecasting US interest rates will remain lower for longer than originally anticipated. This will give foreign central banks time to try and stabilize their own economies.
The US consumer is showing signs of strength as automobile sales are still very strong, and the housing market has continued upwards from strong numbers last year. The labor markets are reporting wage inflation and US consumer discretionary spending is on the rise. We believe this will continue for the next couple quarters and carry the economy into sustainable economic growth.
Energy markets were stronger in the third quarter. On September 28, OPEC agreed to its first production cut in 8 years, sending global oil prices soaring by more than 5%. However, this agreement represents less than 1% of total global oil production. While the OPEC agreement may strengthen oil prices in the short term, it will likely have little long-term effect. Oil producing nations and members of OPEC are trying to support the price of oil to a level where profits are maximized but limit interest in energy alternatives like natural gas. We believe oil will trade in the $40-$60 a barrel range as oil producers balance output versus encouraging energy alternatives.
The political environment has been concerning. As our country tries to evaluate the two candidates for president, the markets will try to find direction based on the risk associated with either candidate. Even though the president is the face of our nation, we believe that the congressional elections matter more as it relates to actual successful new policies. We will continue to monitor the political races and evaluate perceived risk associated with either party.
In conclusion, we believe the markets will continue to climb the “Wall of Worry” as the American consumer spending will be the defining influence on the economy.
As always, please contact us if you have any questions or you would like to discuss your accounts.