We hope your Labor Day was a relaxing one.
August was especially quiet for the financial markets. Stock market trading volumes were the slowest in decades. After late June’s BREXIT volatility, the markets in late summer were on their best behavior. Unfortunately, this welcomed breather is likely to be temporary, as we now head into fall, the election, and a new U.S. President in 2017. September and October have some additional notoriety as two of the more volatile months in a typical calendar year.
The predominant influence on the world’s financial markets continues to be driven by the monetary policies of the United States, Europe and Japanese Central Banks. $12.7 Trillion of sovereign government bonds from Northern Europe and Japan, with negative interest rates, are driving investment capital flow into stocks and real estate, in addition to our own 10 year U.S. Treasury Bonds (currently yielding 1.6%). Ned Davis Research states: “47% of global sovereign bonds yield less than 0%. 80% of global yields are under 1%. 96% are yielding less than 2%.”
The U.S. economy is currently in its eight year of growth, the fourth longest expansion since World War II. The longest was in the decade of the 1990’s, when we rode the technology boom. Since the sub-prime banking crisis and recession in 2008-9, our economy has mustered an annual 2.1% growth rate, the worst post-World War II recovery. Despite the slow growth environment throughout the global economy, the developed world’s Central Banks will continue trying to stimulate economic growth through low-interest rate monetary policies and financial market manipulation.
When we began 2016, the U.S. stock markets experienced the worst start to a year in history. Most of the “market’s fears” did not play out as anticipated. Oil bottomed in mid-February and concerns about a commodity price slump eased, as energy prices stabilized and began to recover. The surprise Brexit vote certainly created some drama, but as we stated in late June “markets are resilient and eventually right themselves to find equilibrium.” With better oil price stability, the improved economic momentum of the U.S., China and most of Europe have reduced anxiety over a possible deflationary spiral. Overall American corporate health remains strong, as most S&P 500 companies enjoy solid balance sheets. Our Pacific Wealth Management portfolios are appreciating nicely, as stocks, bonds and gold are all benefiting from these healthier financial markets.
We expect Janet Yellen and the U.S Federal Reserve Bank will likely wait until December before raising interest rates again. Meanwhile, the world will be watching the final months of a painfully long U.S. presidential election. Despite the fact Trump is likely to tighten the race between now and November 8th, a Hillary win looks like it is being priced into current markets. The Wall Street consensus perceives a Clinton administration as more predictable than Trump, and therefore more desirable. All eyes will also be looking at the outcome of the congressional races to see if the Republicans maintain their conservative majority. With clarity on the political front, the markets will then focus on whether a new government in Washington, D.C. can successfully implement some long-awaited fiscal spending initiatives on infrastructure, education and research to help our country grow in the years ahead.
The choppy financial markets we have experienced over the last 12 months will likely continue into 2017. Pacific Wealth Management portfolios are built to effectively weather this volatility and preserve wealth, while delivering competitive long-term investment returns.
This commentary contains forward looking statements and opinions. These opinions may not develop as predicted. It is our goal to help investors by identifying changing market conditions. However, investors should be aware that no investment advisor can accurately predict all of the changes that may occur in the market.