We never intend to be political, but we decided to dive into a recent issue; aluminum. This has been a great debate for many years; which side is better to use for baking, the shiny side or the dull side of aluminum foil. The answer is, it does not matter. According to the Reynolds website, “with standard and heavy-duty foil, it’s perfectly fine to place your food on either side, so you can decide if you prefer to have the shiny or dull side facing out.” The only difference being the foil is “milled” in layers during production. The website states that “milling is a process whereby heat and tension is applied to stretch the foil to the desired thickness. We mill two layers in contact with each other at the same time, because if we didn’t, the foil would break during the milling process. Where the foil is in contact with another layer, that’s the “dull” side. The “shiny” side is the side milled without being in contact with another sheet of metal. The performance of the foil is the same, whichever side you use.” So, there you have it, debate settled.
All kidding aside, we are not implying a lack of concern with the recent tariff threats and what they could lead to. Our belief is that in the end, all sides lose in a trade war. We certainly hope that the threats are a means to get others to the bargaining table. As Trump is quoted in his book, The Art of the Deal, “my style of deal-making is quite simple and straightforward. I aim very high, and then I just keep pushing and pushing and pushing to get what I am after.” From what we are seeing in the bond market it would appear that bond market participants believe the administration will not push us to an all-out battle, and we hope they are right.
As we have talked about earlier this year, volatility is back. The market generally sees less volatility during times when the Fed is adding liquidity. Once that changes, volatility ensues. The current Fed chief does not seem to be bothered by volatility like Bernanke and Yellen before him. There is no longer the “Greenspan Put” in place. During Greenspan’s tenure, he would reduce the Fed Funds Rate (a put) when a crises arouse. But, those actions by Greenspan were believed to have caused the dot-com bubble burst. In the end, we are actually returning to a more normal market. We rarely see a year like 2017 with the market showing so little effervescence.
Emerging markets were the stand out last quarter as they posted positive numbers. Technology stocks took it on the chin last quarter with Facebook leading the charge. Technology represents a large portion of the S&P 500, so the joy we felt last year with tech surging turned to pain as tech fell. We anticipate continued pressure on tech as there may be heightened pressure to regulate that sector. The top developed markets were Finland, Italy and Singapore with Switzerland, Australia and Canada falling to the bottom. Top emerging markets were Egypt, Brazil and Peru with India, Poland and the Philippines at the bottom.
Interest rates increased in the US during the first quarter. The yield on the 5-year Treasury note rose 36 basis points to end at 2.56%. The 10-year Treasury increased 34 basis points to end at 2.74% and the 30-year Treasury bond rose 23 basis points to end at 2.97%. You will also see in the chart below the short-term rate increase from the beginning of the year with the Fed increasing the overnight rate. The curve is starting to flatten out and we do not see a benefit to extending maturities at this point. The Fed should be making additional moves this year. They do not want inflation to get out of control; such as in Venezuela where they faced a surge of inflation of around 13,000 percent. We hope the Fed does not get overly aggressive as history has shown that once they begin to raise rates, they often go too far. Much like having that last drink, going too far can lead to a hangover. Financial hangovers tend to lead to stalled growth and recession.
The economy is not showing signs of stalling; in fact, it looks pretty healthy. The recent volatility and pull back could actually be beneficial to the current bull market as valuations dip to more attractive levels. The first quarter is over and earning season will be upon us. Thompson Reuters has said that the estimated first quarter year-over-year growth rate is 18.5%. That rate is the highest rate of growth in seven years. All of this positivity is out the window if we are to see a trade war come to fruition or if the Fed goes overboard. Market volatility is unnerving, but it’s a normal part of investing. If you’ve built a solid financial plan and a well-diversified portfolio, it’s best to ignore the noise and focus on your long-term goals.
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We look forward to speaking with you soon and thank you for your continued support.
Morgan R. Christen, CFA, CFP®, MBA
Chief Executive Officer
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