By John Stewart
Chief Investment Officer at Farmers Trust Co.
Week in Review: Rocky Start to September
On the last Investors Edge I talked about how September tends to be one of the more challenging months of the year for equity markets.
Well, investors decided to act on fear that this September could be a rough one by selling aggressively on the 1st of the month.
The S&P 500 index fell roughly three-quarters of 1 percent, while the tech-heavy NASDAQ was down more than 1%.
Adding to investors fears was the continued conflict in the Middle East – oil prices rose past $90/barrel and the 10-year Treasury rate rose above 4.8% for the first time in nearly 3 years.
Higher prices and higher interest rates continue to be the key risk for stocks heading into the fall.
Any resolution with Iran would come along with tumbling oil prices and interest rates and send stocks significantly higher, but for now, strong earnings are keeping stocks afloat – so maybe September doesn’t have to be that scary for the markets after all.
Featured Insight: What’s Your Objective?
Much like most things in life, when it comes to investing, it helps to know what your purpose is.
And also, much like life, just wanting to make money, regardless of how you get there, usually doesn’t lead to optimal results.
In both life and investing, making money is usually a by-product of understanding your purpose and sticking to some tried and true principles in both good times and bad.
For example, you’ve probably heard that your portfolio should become more conservative as you age, but at a certain point your objectives could shift toward providing for the next generation and toward charitable intents, lengthening your time horizon and therefore increasing the amount of equity exposure you should have in your portfolio.
Likewise, you may be young, but if you’re cash reserves are limited, you may want to be careful with your portfolio risk level because of cash needs that may arise quickly with certain life events including marriage, buying a home, and having a child.
Plowing too much money into the stock market, and then being forced to sell into a down market when cash needs arise could prove costly.
Looking Ahead: A Critical Fed Meeting
The Fed will meet again in mid-September and there is a better than 50% chance they hike rates according to market pricing of Fed Funds futures.
We would view a rate hike as a mistake given that higher rates can’t fix a supply shock like the one we’re currently dealing with in oil markets.
Higher oil prices are already a depressant on aggregate demand, and a rate hike would only hurt demand further – possibly risking tipping the economy into a recession, or at least causing an unnecessary slowdown
The new Fed Chair, Kevin Warsh, knows all this of course, and likely does not want to hike interest rates. Rather, he is trying to strengthen the dollar by making the market THINK the Fed might raise rates to buy more time for a resolution to the conflict in the Middle East.
Nevertheless, there IS a chance the Fed hikes rates this month. Unfortunately, that would very likely cause a selloff in stocks, making investors fears of a scary September come true.