As we enter into the second half of the year, our economy has been following a similar pattern as it has in the previous couple of years – a disappointing first quarter leading into a seemingly better second quarter.
While recent short term improvements in sales, manufacturing, and consumer spending is welcome news, longer term trends are still under pressure. Employment and the super-hot housing market are both slowing, and wage growth is still stagnant. These factors, along with others have led interest rates to remain at historically low levels in the United States. A great opportunity for those seeking a mortgage or refinance, but not so good for savers in bank accounts and bondholders.
In fact, more than one third of global government bonds being issued today have a negative yield! That means, the investors purchasing the bonds are expecting to receive back less money in the future when the bonds mature. If that doesn’t make sense, good, because it shouldn’t. Normally, people invest their money, putting it at risk, for a chance at receiving a return. But of course, negative rates are not normal and nobody knows the long term impact on the global economy. We don’t believe negative rates are likely in the United States, but we expect the pace of rate increases to remain slow.
Elsewhere in the world, we experienced history in the making at the close of the second quarter. The people of the United Kingdom surprised everyone when they voted to leave the European Union, becoming the first country in history to do so. Global markets reacted strongly negative to the “Brexit” news. Fortunately, most indexes have bounced back since then. Within the first two weeks of the third quarter, the S&P 500 and other domestic market indexes have fully recovered and are trading at new all-time highs. This probably isn’t the last we’ll hear about “Brexit”, after all London serves as a major financial center for the entire European region. For the moment markets have calmed as everyone awaits anxiously to see what transpires as a result of the UK split with the EU.
Not to be outdone, the US political system has generated some alarming headlines of its own. Disappointingly, both presumptive presidential candidates have the highest “strongly unfavorable” rating ever recorded heading into the general election. Regardless of the winner, we expect to see continued political gridlock in Washington, a cause for concern. To make matters worse the country has been rocked by recent terrorist attacks and misplaced violence involving police officers. Many point to growing inequality as the root cause of racial tensions flaring up across the country, and evidence of social injustices are exacerbating the issue. Nonetheless, it is undeniable we have critical problems to solve domestically, all of which have an impact on our economic health.
On a positive note, consumer sentiment is rising and recent college graduates are starting to see better career opportunities. Most American households are also in better financial shape than they were a decade ago. Almost 95% of mortgages are in good standing and credit card debt is well off its peak during the height of the recession.
Looking forward, exciting new technology continues to push the envelope across all businesses. Developers are beginning to tap into the real power of artificial intelligence, augmented reality, and autonomous driving vehicles. These technologies, and more, are in their infancy and have the power to affect our daily lives in ways we haven’t yet imagined.
We expect volatility to pick up in the second half of the year as a contentious election process and change in leadership will likely rattle the nerves of investors. Additionally, we have concerns about near term growth and the impact of international pressures on markets. At this time, we are focused on selling over buying, taking profits off the table and strategizing how to re-invest those assets later. Buy low – sell high.