Broker Check

Interest Rates And Trade

| June 18, 2019
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About once a month or every six weeks, I write a post that explains what I think about the stock market and the economy as a whole.

This is by no means a prediction of what I think will happen. It’s more of an explanation of what’s happening right now, the impact it could have on the market, and how to plan for said events.

Here’s what I think.

Every other day we hear talk about interest rates. Is the FED going to hike or cut?

Honestly, it depends. The more likely a cut becomes, the more the market prices it in. The more the market prices it in, the stronger the market becomes. The stronger the market becomes, the less likely it is for the FED to cut.

The FED will cut if they think the expansion is in jeopardy, but if the market anticipates the cut, we’ll see a run-up in stock prices and that will dissuade the FED from cutting.

See the problem?

What’s also playing a factor is oil. The threshold for profits for these oil companies is $50 per barrel. As long as the price of oil stays above $50, those companies can produce oil profitably.1

However, if the price drops below that mark, you’ll see a ripple effect. Oil producers will have to shrink balance sheets. This will force financial institutions to be picky about who they lend to. A restriction in the money supply can hinder the expansion.

One other factor...trade. Further escalation/problems regarding our trade war with China has negative consequences. It helps that Trump got a deal done with Mexico. That gives him a little more leverage.

All in all, the trade war is bad for the economy. The sooner it gets resolved, the sooner we benefit.

If this continues to get drawn out, we’ll start to see more negative effects. The economy will start to suffer and the FED will be more likely to cut rates.

If a trade deal is done, the market and the economy will see a strong push to the upside, and the need for a rate cut will probably go away.

How do we plan?

That’s the key question. No matter what happens over the next year, two years, or ten years, your plan should rarely change.

Unless you are near retirement or are in retirement. If that’s the case, you should be allocated more towards bonds for safety. Be advised: When bond rates go up, bond prices go down, and vice versa.

There’s a fair amount of uncertainty in the markets so my thought is to plan for each scenario. For folks that are in or near retirement, your primary focus should be the preservation of capital, with capital appreciation as secondary. Be more conservative than you normally would.

For anybody else, I really wouldn’t change much. It’s not usually good practice to make changes during uncertain times. It’s more beneficial to stay the course. Especially if you have decades to save and recoup losses.

Conclusion

We will see how this all plays out. Trump is supposed to me with Xi at the G20 to discuss trade, or he’s willing to meet. No clarification if they are actually meeting.

Whatever happens, the future is always uncertain. Plan according to your goals, risks, time horizon, and your behavioral preferences.

1 - Data about oil profitability found on the Dallas Fed website.

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