Description: Tim Courtney, Chief Investment Officer, CIMA®, discusses impactful areas of the market to keep an eye on as we move into Q3.
3 Things to Watch at the Start of Q3
By Tim Courtney, Chief Investment Officer, CIMA®
hasn’t been quiet this past quarter. The yield curve has been flattening1, markets were volatile2 and tariffs began to spark
the makings of a trade war3.
On the flip side, economic growth has continued to be strong4, the jobs market is booming5 and consumer confidence is
high6. Among all this
moving and shaking, investors appear to be in an overall attractive
Moving into the
third quarter of 2018, we believe the economy will stay positive overall.
In the meantime, we’ll continue to keep an eye on three of the most
impactful areas of the market.
1. The Federal Reserve. One of the key
things to watch in Q3 will be the Fed, which is set to continue raising
interest rates this year7.
Amid the threat of rising inflation levels8,
the Fed will likely speed up the process of raising rates in the coming months.
Raising rates could exacerbate the fear of a yield curve inversion, which has
historically been a sign of recession9.
On the other hand,
raising rates will continue to increase capital flow to the U.S.10 When you can get 2 percent yield
on a U.S. Treasury bill11, the
rates in the rest of the world don’t look as appealing. Because of this, along
with the stability of the U.S. economy as a whole, more capital continues to
flow into the U.S., thus appreciating the dollar. In the coming months, it will
be interesting to observe how the Fed’s increasing rates affect the markets.
market sensitivity. As markets have grown more expensive, they’ve become
more reactive. High prices come with high expectations; any whiff of
imperfection sends them into volatility. With company earnings coming in strong12 and the job market full, these
high expectations only continue to move higher.
News that interrupts
these high standards, such as an escalating trade war with China, sends the
market into periods of volatility. This will most likely continue into Q3,
affecting both stocks and bonds. However, industries that are not priced for
perfection (such as small businesses13)
will trade at lower levels and feel this volatility less than the high-flying
3. Global growth. Between 2014 and
2016, most of the world – including certain U.S. sectors – fell into a recession14. Since that recession, global
economic activity has been steadily and synchronously increasing. The world’s
largest economies have been in growth mode, trade has increased and prices have
However, disappointing numbers in Europe over the last couple of quarters16 have indicated this synchronized world growth may be drawing to a close. Their stocks have been priced for problems, rather than perfection as in the U.S. And while the U.S. has not quite felt the global effects yet, it could if this trend continues.
We will keep our eye on these issues and while we expect volatility to continue, we think overall economic growth appears steady and markets are priced appropriately globally.
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