Quarterly Newsletter- 07/09/2018
As the second quarter comes to a close and we head into the third quarter, I feel like we are all on a large ice breaker ship in the northern Atlantic. The weather is average but can get nasty at any time and as we look out over the horizon we see some icebergs ahead we are going to have to navigate.
The first iceberg I see is the interest rate iceberg. As I have warned numerous times on our blog, a rising interest rate environment typically leads to a slowdown in the stock market because the cost to borrow money for individuals and businesses goes up. When borrowing costs go up, individuals buy less high priced assets (like homes & cars) and businesses don’t expand as much, leading to a compression in profits.
The second iceberg I see is the trade relations iceberg. For years, we have had trade agreements in place which allowed our goods and services to flow freely (or not so freely) between nations. These trade agreements have all been thrown out the window and new ones are being drafted as we speak. In my opinion I think we need to be careful here. Sparking a tit for tat trade war with any one country, or all countries, could have devastating effects on the global economy and ultimately lead to lower stock markets around the world in addition to higher prices for all imported goods.
The third iceberg I see, and probably the most concerning, is the national debt iceberg. The Congressional Budget Office (CBO) has forecast our national debt will rise by a little less than one trillion dollars each year over the next 10 years due to the Tax Cuts and Jobs Act of 2017. I equate this to having a maxed-out credit card and calling the bank each year to ask them if you could borrow more. Of course they are going to say NO, but our Congress continues to say yes. This will be one of our nation’s biggest problems sometime in the future.
As we navigate through this ice field, there are some positives to look forward to: 1) we have the strongest ship in the fleet, 2) 10 years ago was the start of one of the worst storms in history and we persevered through it 3) though rough seas may be coming, this storm shall pass, and calmer waters will prevail.