What’s going on with this market!? The last week and a half have been wild. Let’s recap and talk about what it all really means. There have been a lot of moving pieces, so it is easy to get lost with all the talking heads on tv all over the place.
Last week we had news of the Fed cutting rates, which the market liked. What does that mean exactly? The Fed uses its powers to either ease or restrict the flow of money depending on the economic conditions. The idea with cutting rates is to make it easier for banks to lend money, lower credit card interest rates, and get people to spend money. This should in turn, ease the effects of a slowing economy and hopefully get a needed spark. Good news, right? Yes, the Fed is doing what it is there for!
What happened next? The President announced another round of tariffs on China, further fueling the trade war. The market didn’t like that idea and we saw an immediate sell-off. More tariffs mean higher prices on your goods from China. That extra cost charged to companies that import Chinese goods, gets directly passed to you, the consumer. From there, the expectation is, we would be buying less of those goods, and companies would see less profits here in the US. Due to that, you could make the argument that they would then, cut bonuses, wage increases and hiring of new employees. All bad things, right? Yes! That is pushing the accelerator on the slowdown of the economy.
Well, it was decided that this might not be the best idea and an announcement was made we would be holding off until December on any more tariffs. Yes, good news! Market pops back up.
Now we are up to today. What happened today to cause one of the biggest sell-offs of the year? The effects of the first round of tariffs were going to be felt sometime. It was just a matter of when as we are restricting the flow of goods and slowing down economic growth. Today we saw a flip in bond yields of the 2 year and 10 year bonds. That means you would make less on purchase of a 10 year bond than you would on a 2 year bond. It’s a sign that people are less confident in what is going to happen in the long term versus the short term. It’s also been a past indicator of a recession on the horizon. How far out? In the past, it’s been about 2 years. Does that absolutely mean that a recession is going to happen? No. Past occurrences can’t be an absolute predictor of what is going to happen in the future, but we should learn from them and be aware. This holds especially true since the rapid advancement in technology, in my opinion. Keep in mind it isn’t the same market as 1987, or even 2007 for that matter.
The real question is, what do you do? First, don’t panic! This doesn’t mean everything is coming crashing to a fiery end of the world. Make a quick acknowledgment of the panic, take a deep breath, and know it is ok to be cautious. Next, let your plan guide your actions. Most likely, your time horizon is much longer than next year or two. Remember, time in the market is always more important than timing the market. We have expected something like this to come along for a while and we know they don’t last forever. Rebalance investments if necessary and look for opportunities in a market where things are going to be on sale! Talk with your advisor (hopefully me….just sayin) to make sure your plan still aligns with your objectives.