Good day, everyone. I’m Gene todd from First Bank’s Wealth Management
group. I’m recording this video on November 1st and
all that I can say is thank goodness October is over. What a tough month for the markets! October will go down as the worst month for
stocks since 2011. The S&P was down 7% for the month. All major indexes were in or near correction
territory. FAANG stocks – I’m talking about Facebook,
Amazon, Netflix, and Google – were bitten. Collectively, those stocks were down 19% for
the month. How did this happen? The markets were looking really good in September. I can think of three likely suspects: rising
interest rates, midterm election uncertainty, and continued trade war worries with China. You may remember that I mentioned this as
a potential risk to the market this summer. I said that conventional wisdom was that we
would avoid a trade war, but we all know conventional wisdom is often wrong. So today, I want to address these three suspects
one at a time. First – rising interest rates. Yes, it’s true that interest rates are rising. The FED has raised rates three times so far
this year, and we think we get a fourth increase in December. So the FED funds rate sits at 2.25% today
and will be at 2.5% at the end of the year. Any number under 3% is considered stimulative,
the 3-4% range is considered neutral, and you really need to be over 4% to be considered
tight. Even if we were to get four rate increases
next year, which the market is not anticipating, we would still be in a neutral rate environment. You can also look at the 10-year treasury
yield which is around 3.1% today. The 25-year average for the 10-year is 4.4%
and the 50-year average is 6.5%. Hey, the point is that we don’t see high interest
rates killing the market in 2019. Second – midterm elections. Now, by the time most of you watch this, the
midterm elections may be over. As I record this, they are just five days
away. The market’s fear is that a big win by the
Democrats will undo tax reform and roll back regulatory reforms, both of which have been
really good for stocks. Now, obviously, I don’t know the election
outcome, but to undo the tax cuts as well as regulatory reform, the Dems would need
to win a veto-proof majority in both houses of Congress. We don’t think that is going to happen. Third – (and the one that concerns us the
most) is trade wars. Now, here is what we know: Europe has agreed
to some concessions on tariffs and have at least stated to work together with the US
towards zero tariffs. We went head to head with Mexico and Canada
earlier this year and we ended up with pretty positive outcomes on new trade agreements. China is still in the early innings of negotiations
and it’s too close to call an eventual outcome. But on the positive front, China has cut some
tariffs on US products, including machinery, electrical equipment, and textiles. The overall level of tariffs went from 9.8%
to 7.5%. So we know that China is willing to move and
make some changes. This is a start! On the negative front, the US tariffs already
in place on China, which are 10% on $200B of Chinese imports are already impacting American
companies such as Caterpillar, PPG, Sherwin Williams, and other industrial companies. This 10% goes to 25% in January! If we don’t get closer to a resolution as
we approach January, we could see more market sell offs. We remain sanguine that a trade deal with
China can get done and we will avoid an all-out trade war. We know that their economy and their stock
market are in tough shape, and putting all this behind us is in both country’s best interests. The market can resume its upward trajectory
if we can positively resolve the China trade issues. We don’t think that increased interest rates
and the midterms mean doom for the markets any time soon. Selloffs are a buying opportunity for long-term
investors. Buy low, sell high, and stay invested! Thanks for watching – and if you have questions,
comments, or ideas for future topics, email me at Gene [dot] Todd [at] fbol [dot] com. See you next time.