As we continue to move through the summer, a few of our investments have heated up. At the outset, we would like to provide insight in the stock and bond markets as well as an overview of events happening here in Washington D.C. that are affecting those markets.
The stock market’s “gentle volatility” is here. We have been extremely cautious about the overall stock market for the better part of the last eight months. We are not overly concerned about the economy as it continues to show growth, albeit slow growth. During this time, there are levers that the Trump Administration would like to pull to allow our economy to grow at a rate of 3 percent, which is more in‐ line with our historical average. Our concern with the stock market is that it has shown separation from the economy for the last four to five years. While the economy has grown about 1.3 percent per year over that last six years, the stock market has shown much more significant growth and is setting records almost daily. The bond market faces pressures over the looming possibility of a further increase in interest rates later this year and the normalization of the Federal Reserve’s balance sheet. Obviously, both events will impact long term bond prices. There is a growing contingency of financial professionals who believe the Federal Reserve should not further increase interest rates. As a part its famous “Quantitative Easing,” program, the Federal Reserve bought a significant amount of bonds (municipal, Treasuries, and, to a lesser extent, corporate) to keep interest rates low by creating artificial demand.
With the economy now on much sturdier footing, the Federal Reserve announced that it will sell these bonds periodically to “normalize their balance sheet.” Creating artificial sellers will drive interest rates higher, which will bring down bond prices. Our current bonds we believe represent great value and we remain steadfast to holding them until maturity.
As discussed in last month’s letter, Congress’s difficulty in passing new legislation to repeal and replace the Affordable Care Act continues to have reverberations in financial markets. On the last Tuesday of June, Senate Majority Leader Mitch McConnell announced that the vote on the Senate version of a new healthcare bill would be pushed back until after the July 4th recess. The Dow Jones Industrial Average was up approximately 75 points prior to the announcement (from 9:30 AM to 1 PM), however, ended the day down 50 points. Within a 20‐minute span, the Dow moved 125 points down in direct response to the delay in the Senate. This is demonstrative of how markets react to unfavorable news from Washington, D.C. The floundering healthcare bill portends of future developments in Congress. We are anticipating the high likelihood of a government shutdown in October. While this outcome is not yet receiving widespread media coverage, it is important to be aware of the possibility and its inevitable repercussions.
As we transition into the Fall, we always want to remember that the end of summer usually provides light trading volume so movements in stock and bond prices can be a little more volatile. Rest assured that we are monitoring all incoming news events and adjust our positions accordingly.