The Verus Team

Interest Rates, Inflation, and Tariffs – Oh My!

Derek Majkowski. Any opinions are those of Derek Majkowski and not necessarily those of RJFS or Raymond James.

“Lions, and tigers, and bears, oh my!” – Dorothy, the Scarecrow and the Tin Man reacting to the noises they hear walking through the dark forest on the Yellow Brick Road.

Drawing attention to this great movie classic is nothing new.  The movie entertains and has often been something one can draw comparisons to help support a message or thought.  For purposes of this post, I point to the noises that we have been recently hearing and has collectively captured our imagination as it pertains to the recent stock and bond market activity.

After jumping out of the gates in January of 2018, the stock and bond markets provided a friendly reminder in February that we cannot anticipate markets to simply go straight up.  While we were processing the impact of a positive environment for corporations given the lowering of corporate tax rates, and the impact on a company’s bottom-line, we were also reminded that prices can correct or change quickly and not all parts of the journey are smooth.

From the peak on January 29th, the S&P 500 went from an intraday high of approximately 2870 to a 2018 intraday low (as we write this) of approximately 2532 on February 9th.  That is almost a 12% swing (peak to trough) over the course of 9 trading days. 

While we experienced those swings in the broader stock market (as measured by the S&P 500 for purposes of illustration), we also experienced an upward move in interest rates.  As measured by the often publicized 10-year US Treasury rate, we saw the interest rate approach near 3% in February of this year.  These are levels not seen since early in 2014.   

Adding “fuel” to the price volatility of stock prices and interest rates “fire” - we also began hearing concerns about inflation.  Inflation, which is generally an increase in the prices we pay for products and services while diminishing the purchasing power of money, is not a subject that has garnered much attention over the past decade. 

Over the past several months however, the idea of inflationary pressures impacting the economy and market has begun to take form.  The true impact on inflation is not one that many current investors truly grasp, because generally speaking inflation has long been tame, or even non-existent.

In fact, for years after the financial crisis, the primary concerns of central bankers and economists has been deflation, not inflation.  The primary reason for the Federal Reserve to maintain a 0% interest rate policy and accommodative stance for so long.

The recent pivot in concern comes (very generally and simply put) on the heels of rising asset prices (stocks and real estate), and the expectations of continued economic expansion due to global growth, favorable business conditions, and improved consumer confidence. 

Oh, and now tariffs.

If following the recent headlines, attention is now shifting to trade agreements between the US and global partners.  The administration has recently floated the idea of imposing some version of tariffs on the imports of certain goods and materials. 

This measure – viewed as protectionism to some - has subsequently triggered government and market pundits to weigh in on the potential economic and inflationary implications of such actions, and in some cases even going so far as suggesting these tariffs could trigger potential trade wars.  This is in turn sparking additional rhetoric that only highlights further potential risk to future economic and market growth.

So what does all of this really mean?  Will interest rates keep rising?  Will inflation heat up?  Will we get into a trade war?  What does that mean for stocks and bonds?

In short, there appears to be a lot of strange noises of late coming from the proverbial woods that can threaten asset prices and portfolios. Which ones are real threats and which ones are just noise? 

Obviously, no one knows..

Interest rates, inflation, and tariffs are the latest risks being featured in the news and being highlighted as potential impacts to one’s investments, or at a minimum as justification for the recent market volatility.  While it is certainly important to pay attention to these potential risks when crafting a plan and investment strategy, they are not the only risks, and consuming oneself with only these risks may prove to be misguided.

Like when Dorothy and crew were broadcasting their concerns and fears speculating on what may be behind the many noises they heard in the woods, the outcome was less dramatic.  Sure a lion lurked, but certainly not one as ferocious as previously expected. 

And while focus is always placed on the immediate and popular concerns of the day, risk always lurks.  This is nothing new.  We can either get wrapped up in the emotion of it all and speculate on the impact and outcome, or we can prepare, be prudent, adapt, and try to stay the course to our own life’s journey.

Ultimately focusing on remaining true to our own personal trip down the yellow brick road. Noises and all..

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“The information provided does not purport to be a complete description of the securities, markets, or developments referred to in this material; it has been obtained from sources deemed to be reliable but its accuracy and completeness cannot be guaranteed. Investing involves risk, investors may incur a profit or loss regardless of the strategy or strategies employed. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Please note, direct investment in any index is not possible. Past performance is not a guarantee of future results.”