Macro Overview – May 2018

Kent Forsey, CFP® Bonds, Macro Overview, Oil Prices, Stocks

Hillspring Financial

Here are a few more thoughts to consider as we attempt to understand the crazy market of 2018 thus far.

Markets persisted on a capricious course in April following announcements regarding tariffs, rising rates, and geopolitical tensions, yet some economists and analysts expect that a tax cut driven rebound is possible.

The 10-year Treasury bond yield reached 3% for the first time since January 2, 2014, stirring inflationary fears and the onslaught of rising loan costs.  The 3% mark represents a psychological hurdle that influences the dynamics of various fixed income sectors.

The market is concerned that the Fed and other central banks may need to take additional actions in order to alleviate a rapid rise in prices and wages should it materialize. Federal Reserve members voted not to inflate rates during their May 1-2, 2018 meeting yet are still on track to raise rates in June and perhaps twice more before year end.

Stocks have been trading in what traders call a trading range, meaning that prices fluctuate but stay within certain levels.  The release of earnings has become a key determinant of prices as the market looks for fundamental validations for pricing stocks.  Company earnings in certain sectors have increased the most since 2010 while the environment for selecting stocks has become tactical and very selective, shying some investors away from the major indices.

U.S. companies benefited from the recent tax overhaul by reducing their effective tax rates and thus lowering their tax expenses.  The decrease in tax expenses led to an increase in earnings for many companies, thus helping to propel stock valuations.

The U.S. Treasure issued $488 billion in government bonds for the first quarter of 2018, the most since 2008.  The issuance is in anticipation of a drop in tax revenue from the recent tax cuts.  Some economists believe that the benefits of the tax plan have not been realized yet as it may take months for visible benefits to appear.

Oil prices reached their highest levels in more than three years as geopolitical tensions drove uncertainty.  Shrinking supplies and the approaching summer driving season are expected to heighten gasoline prices across the country.

The most recent data from the Department of Commerce revealed that GDP grew at an annual rate of 2.3% for the first quarter of 2018, a deceleration from the 3% growth that occurred in the final 9 months of 2017.  Encouraging data released by the University of Michigan reveals that consumer sentiment rose in April driven by favorable views on personal finances and incomes.

Kent G. Forsey, CFP®

Sources: Dept. of Commerce, Fed, U.S. Treasury, BLS, OneBlueWindow, LLC.