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Tariff Tough-Talk White Paper

This follows our most recent message on the impact of tariff tough-talk to market volatility. If you are interested in a little more detail on what is at stake and a potential range of outcomes, JP Morgan Asset Management has authored a white paper that might hit the spot.

White Paper: Tariff Talk by JP Morgan

While Cornerstone Wealth Management is not making wholesale recommendations on asset allocation adjustments or strategy tweaks currently, we continue to review what this could mean for clients with shorter-term liquidity needs or obligations.

If you have any questions about your circumstances, we are eager to hear from you.

Tracking# 1-862544
#Investments
#MarketOutlook
#Tariffs

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Trade Tensions and the Stock Market

Trade tensions have interrupted an unusually calm year in U.S. stocks. In May, the S&P 500 Index fell from an April 30 record high as the United States and China failed to reach a trade deal and escalated tariff tensions. The United States also proposed new tariffs on Mexico, further complicating the outlook for trade. The turnaround in trade talks has surprised investors and rattled global financial markets.

While a resurgence in trade tensions is unnerving, investors should pause and consider the fundamental implications of increasing tariff rates. Higher tariffs and other retaliatory measures could potentially weigh on economic activity and inflation, but the escalation is not expected to derail this expansion. In the worst-case trade scenario, gross domestic product (GDP) growth could be closer to 2% this year. While slower, that pace of growth is largely consistent with the average pace over the last decade.

It’s still possible that the United States and China can avoid further trade escalation, since it appears the bulk of the agreement is already in place. The United States and China are expected to reach some kind of a trade agreement—or at least a trade truce—in the next few months. And trade issues with Mexico likely will be resolved sometime this summer.

There has been a lot of fear-based decision-making in markets. Some nervousness is understandable, but current concerns on tariff impacts look overblown. Most likely there may be more bouts of volatility ahead as President Trump and China President Xi pursue a new path to compromise. In the end, look for a deal that should help support continued growth in the United States and global economies.

Some stock market weakness after such a strong start to the year was to be expected. While it’s felt like a turbulent month, the S&P 500’s decline has been relatively modest compared to previous experiences.

The U.S. economy continues to grow at a solid pace, and job creation is steady. Wages are rising at a healthy rate, and some benefits of tax reform and fiscal spending are still supporting demand. Earnings growth also has been better than feared, and S&P 500 companies have the potential to exceed low profit expectations the rest of this year. Ultimately, earnings growth and solid fundamentals could drive the S&P 500 to new highs later in 2019.

It’s important to remember that stocks’ rally is still intact, and pullbacks like the most recent one are normal events over the long term. While near-term volatility can be uncomfortable, it has helped curb excesses in the markets and sustain healthy sentiment, allowing for what is now the longest bull market on record. Volatility may also provide opportunities for suitable investors to rebalance, diversify portfolios toward targeted allocations, or add to equity positions.

If you have any questions, please feel free to contact me.

#Investments #MarketOutlook

Important Information

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

Economic forecasts set forth may not develop as predicted.

All data is provided as of May 31, 2019.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.

This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy. Tracking #1-860638

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Four Consecutive Months of Growth

If it seems like the financial markets have been off to an unusually strong start to the year—you are correct. The S&P 500 Index has risen for four consecutive months, resulting in the strongest start to a year in more than 30 years! To be fair, the early gains included recovery from oversold market conditions in December, but a steady combination of monetary policy, economic performance, and corporate profitability have pushed the S&P 500 to record levels.

While we’re pleased with the new highs, it’s also important to keep an eye on what could temporarily disrupt solid market performance. Three key areas when making investment decisions are market fundamentals, technicals, and valuation. A review of each suggests the market can continue to provide longer-term opportunity, but with the possibility for shorter-term volatility. In any event, it’s important for suitable investors to diversify their portfolio strategies to best take advantage of market conditions.

Market fundamentals remain encouraging. U.S. economic data have been steadily improving in recent months, with signs of stabilization in manufacturing and gains in employment, personal spending, and business investment. In addition, the Federal Reserve appears set on keeping interest rates at current levels for the near future, allowing market interest rates and fiscal tailwinds to help support domestic activity. This has been a healthy offset to concerns of slowing global growth, with a potential U.S.-China trade deal remaining the wild card.

Market technicals, which include sentiment, pricing, and volume patterns, currently indicate solid momentum, while a variety of industry surveys suggests investors have a healthy balance between appreciation and skepticism of the recent market gains. Although the S&P 500 recently hit a new high, it took more than six months to exceed its previous record set last September. Historically, when the S&P 500 has had at least a six-month “pause” between records, returns over the following 12 months were above average, which may indicate good news for summer markets.

The third important criteria is market valuation. Rather than simply looking at the price-to-earnings ratio (P/E) when making equity investment decisions, it’s also important to look at the P/E relative to the current level of interest rates and inflation, which both remain well below historical averages. As a result, although the market may be trading at record levels, it doesn’t appear to be overvalued.

It’s been quite a run for equity markets in the first four months of 2019. A quick review of market fundamentals, technicals, and valuation suggests a near-term pullback may be possible. However, suitable investors could use volatility as an opportunity to rebalance diversified portfolios or add to current positions to help work toward long-term investment goals.

If you have any questions, please feel free to contact me.

Important Information

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.

Economic forecasts set forth may not develop as predicted.

All data is provided as of April 30, 2019.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy. Tracking #1-849032

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April Showers, May Flower and The Economy

April brings showers, baseball, and historically, the best month of the year for the S&P 500 Index (for the last 20 years). On top of that, the S&P 500 had its best first quarter since 1998, and in March we celebrated the 10-year anniversary of the current bull market. Although the U.S. economy hit a soft patch to start 2019, the fundamentals supporting economic growth and corporate profits lead us to believe the bull market and this economic expansion could continue.

While stocks rallied in the first quarter following the sharp December decline, expectations for first quarter gross domestic product (GDP) appeared to dampen and stand at about half the pace that it did last year. Slower GDP growth was due mainly to lingering effects from the government shutdown, bad weather, U.S.-China trade tensions, and slower growth overseas—particularly in Europe. The good news is these temporary headwinds are expected to clear, setting up a potential pickup, albeit slower, in economic growth in the second quarter and beyond. In addition, the U.S. consumer spending outlook remains solid, buoyed by continued gains in employment and wages.

A U.S.-China trade deal, a persistent roadblock for business spending, could be finalized in the coming weeks or months, which should help business confidence and spur capital investment. At the same time, last year’s package of additional government spending of roughly $300 billion is still giving the economy a boost. Together, these bode well for an increase in business investment, which tends to lead to greater productivity and profit growth, keys to extending this economic expansion.

Signals of weaker growth from the bond markets have not gone unnoticed, yet these are seen more as evidence of an aging business cycle and something to expect as we enter the later stages of the cycle. Parts of the yield curve inverted briefly in March, which means long-term interest rates fell below short-term rates, and some consider this movement a harbinger of recession. While this garnered a lot of media attention, the inversion was very small and short-lived, and the attention may have been a little overblown. For its part, the Federal Reserve made a point to reiterate its pause on interest rate hikes to help support market sentiment during its March meeting.

Like April showers that bring May flowers, the outlook for the rest of 2019 continues to look positive. But that doesn’t mean a storm or two might not also come through in the form of increased market volatility. Stocks are still expected to be higher at year end than they are now, despite weathering potentially slower economic and earnings growth. U.S. growth should stabilize and slow slightly, and inflation may creep higher as the risks subside. Overall, there’s still plenty of evidence that solid U.S. fundamentals are firmly planted and a recession is unlikely on the near-term horizon.

If you have any questions, please feel free to contact me.

Important Information

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

Economic forecasts set forth may not develop as predicted.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

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Time to panic and sell bonds? Not so fast.

The article below include comments from thought-leader Bob Veres on the question we get occasionally on interest rates, the “inverted yield curve,” and the potential performance of bonds. Please reach out to us if you have any questions.

Rich Arzaga, CFP®

There’s almost zero chance that you missed the alarmist headlines on Friday about the inverted yield curve, which (you probably also read) inevitably signals an upcoming economic recession.  So the smart move is to retreat to the sidelines until the economic bust is over, and get back into the market once the yield curve has developed a healthy steepness.  Right?

Investors certainly thought so.  The S&P 500, on Friday, dropped 1.9%, as people reacted as if a recession would happen on Monday.

It would be nice if investing were that simple.  But in the current case, it is much further from simple than normal.

Why?

The yield curve is a line plotting out the interest rate (yield) that is paid to investors across maturities, from three month to 30 year.  An inversion happens whenever the shorter maturity bonds provide higher yields than longer-term ones—which is counterintuitive since the risks of holding bonds longer-term are greater than if you’re parking your money for a few months.  Longer-term, you could experience inflation, default or a rise in interest rates that will make you look stupid for committing your money at a particular rate for 10 years or longer.

This current so-called “yield curve inversion” really looks more like a flat line stretching from short-term to intermediate-term bonds.  What was widely reported was a (probably brief) moment when the 3-month Treasury note offered higher interest than the 10-year bond—by (get ready to be shocked) 0.022%.  You could see roughly the same spread difference around the beginning of 2006, which was not a very clear signal and did not result in a recession until a year and a half later.  Some months afterwards, the yield curve inverted with a vengeance, although it righted itself before worst carnage of 2008.

The lesson here is that, yes, we have experienced a yield curve inversion sometime before each of the last seven recessions.  However, there have also been two false positives—an inversion in late 1966 that was followed by economic growth, and a largely flat curve, like the one we are experiencing now, in late 1998 that also didn’t presage a recession.

Moreover, even if we accept the idea that a yield curve is a recession signal, the actual timing is almost impossible to predict.  Data from Bianco Research has shown that over the last 50 years, a recession followed, on average, 311 days later—roughly a year.  This is an average of some pretty broad fluctuations.  Following that brief inversion in 2006, the economy didn’t experience recession for another 487 days.  An inversion in December of 1978 was followed by a recession—389 days later.  In contrast, it took just 213 days for the U.S. economy to enter recession territory after a July, 2000 yield curve inversion.  Based on this evidence, selling the day after an inversion seems like a poor strategy.  Selling a month, or six months after doesn’t make sense either.

Finally, some economists think that the yield curve is not nearly the accurate signal that it once was.  The reasons are a bit technical, but they have to do with the increasing control that the central banks—including the U.S. Fed—have on the shorter end of the yield curve.  The Fed and other central banks have been buying up government bonds for their balance sheet, which means the shorter-term yields can no longer be seen as market driven.

So what IS an accurate signal of upcoming recession?  There are some tried-and-true signs, including an overheating rate of GDP growth (which we haven’t seen at all in this long, slow recovery), rising unemployment (nope) and spiking interest rates (no sign yet).  Another sign that directly impacts the yield curve is a sudden demand for longer-term bonds as a safe haven for nervous investors, causing the bond rates to drop below shorter-term paper.  There has been no indication of a shift in demand for bonds over stocks.

So what does all that mean?  The simple lesson is: don’t fall for clickbait.  We are still as much in the dark about what the economy and markets will do in the future as we were before 3-month Treasury bills returned a shocking 0.022% more than 10-year Treasury bonds.  We might experience a recession this year, or next, or in 2022.  All we know for sure is that we WILL experience one, possibly with a few unexpected market ups and downs in the meantime.

Sources:

https://www.marketwatch.com/story/the-yield-curve-inverted-here-are-5-things-investors-need-to-know-2019-03-22

https://seekingalpha.com/article/4250705-inverted-yield-curve-another-viewpoint

https://www.marketwatch.com/story/sp-500-could-fall-40-as-yield-curve-inverts-says-analyst-of-one-of-2018s-best-hedge-fund-returns-2019-03-22

https://www.forbes.com/sites/simonmoore/2019/03/23/the-yield-curve-just-inverted-putting-the-chance-of-a-recession-at-30/#2f7232bb13ab

https://www.cnbc.com/2019/02/20/a-recession-indicator-with-a-perfect-track-record-over-70-years-is-close-to-being-triggered.html

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The Markets and today’s weather

Date this February 8, 2019

Headline: The Markets and today’s weather

Most of the country might still be in the throes of the winter, but after extreme cold throughout many parts of the United States, thankfully the weather has warmed up. Stocks followed a similar path, warming up in January after a chilling December. Since the lows in December, the market is up more than 16% (as of Feb. 6, 2019). Some recent reports have been encouraging and point to a steadily expanding economy.

Meanwhile, market participants have become more comfortable with the Federal Reserve’s (Fed) message. While these are positive developments, the likelihood for further volatility persists. Investors are encouraged to remain focused on the fundamentals that support a positive outlook for continued economic growth and stock market gains in 2019.

Recent economic data have pointed to a U.S. economy that remains on sound footing. The latest reports on U.S. manufacturing came in better than expected, reversing December’s disappointing data and signaling continued expansion in the manufacturing sector. Also, more than 300,000 jobs were created in January, while inflation remains contained. These data points signal a growing U.S. economy.

The Fed and the market haven’t seen eye to eye on policy over the past year, but that may be changing. At its last policy meeting, the Fed announced it would be much more patient with future rate hikes, which could remove one of the big uncertainties for investors. The Fed reinforced its stance that the U.S economy remains solid, and cited factors such as slowing growth in China and Europe, trade risk, elevated uncertainty, and deteriorating investor sentiment as influencing its recent shift. Because of these crosswinds, the central bank has chosen a wait-and-see approach, and will likely hold off on policy moves until there is greater clarity on global economic conditions. The stock market responded positively to the Fed’s message that interest rates would be lower than had been initially anticipated, with its first gain on a Fed announcement day since Jerome Powell took over as Fed chair.

With stocks up strongly since late December, the next move higher may be tougher to achieve. However, in addition to the solid economic backdrop, there are several factors working in stocks’ favor that could send stocks higher from here. Stocks are less expensive than bonds. Earnings growth has been solid. A potential U.S.-China trade agreement still appears likely. And finally, a broad and diverse mix of stocks has been rising, a symptom of a healthy market advance. Key risks working against stocks include slowing growth overseas and budding earnings headwinds—although a slowdown in earnings growth is very different from a contraction.

In closing, although we should remain prepared to weather any further market volatility, these signs are encouraging—much like early signs of spring peeking through the snow. I encourage you to stay focused on the fundamentals supporting the economy and corporate profits.

#Investments

#MarketOutlook

Important Information

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment Economic forecasts set forth may not develop as predicted Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

Tracking #1-819896

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LPL Research Outlook 2019: FUNDAMENTAL: How to Focus on What Really Matters in the Markets is filled with investment insights and market guidance for the year ahead.

LPL Research believes the following three themes will be key to the markets:

  • Sustaining growth via fiscal policy. We expect the ongoing impact of fiscal stimulus will be readily apparent in 2019 and that policy will continue to play an important role for the economy and financial markets—potentially extending the duration of the current business cycle.
  • Creating opportunity amid rising volatility. We believe any bouts of market volatility should be embraced—not feared—by suitable investors as an opportunity to rebalance portfolios toward targeted allocations.
  • Fundamentals in focus. Despite the market weakness we saw at the end of 2018, at LPL Research we expect the U.S. economy to grow in 2019 and support gains for stocks. Risks such as trade uncertainty, slowing global growth, and geopolitics do require careful monitoring, however, for their potential impact on the markets and economy.

“We do not anticipate a recession in 2019, thanks to the fundamentally driven economic momentum, combined with fiscal incentives and government spending programs on tap for the coming year,” said Executive Vice President and Chief Investment Strategist John Lynch. “We encourage investors, where appropriate, to base any investment decisions on the fundamentals rather than acting on speculative headlines, especially as the cycle matures and the 2020 presidential election now comes into increased focus.”

Armed with the investment insights of LPL Research’s Outlook 2019, and supported by the guidance of a trusted financial advisor, we expect investors can remain prepared for investment opportunities ahead. Read more about our forecasts and key themes in the full Report.

Click here to download the full report

#Investments
#MarketOutlook

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. The economic forecasts set forth in the presentation may not develop as predicted. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss. This research material has been prepared by LPL Financial LLC.

Tracking #1-803550

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Latest Market Action

Another year is drawing to a close, but so far neither market volatility nor market-moving headlines have shown any signs of winding down. As we reflect on a challenging 2018 and look for bright spots in 2019, confidence in continued steady growth in the US. economy remains. The list of the market’s concerns is long, but fundamentals for stocks appear favorable. Here is a brief check-in on the latest developments across these areas of concern and thoughts on the increase in market volatility.

At the end of November, Federal Reserve (Fed) Chair Jerome Powell restored investors’ confidence in the Fed’s commitment to flexibility, addressing worries that the Fed might act too aggressively. He stated that current interest rates are “just below neutral,” suggesting a more gradual pace of rate hikes than in his October statement that rates were “a long way from neutral.” The stock market rallied in response. Although the market dipped again on global growth concerns, this reassurance from the Fed is a good indication that the central bank will remain pragmatic when it comes to evaluating risks for the economy and stock market. Markets should be able to handle a hike in December and one or two in 2019, consistent with current expectations.

The impact of tariffs and ongoing trade uncertainty on global growth prospects continues to contribute to market volatility, including the recent sell-offs. Progress was made at the G20 summit over the December 1–2 weekend, and markets welcomed the 90-day trade truce while negotiations proceed, although stocks gave back the gains immediately following the announcement when conflicting reports came out around what was agreed to at the summit. Despite this, the fact that the two sides are talking and making some progress is encouraging.

It’s important to recognize the difficulty that market volatility can have on investor confidence. As hard as it may be to believe, this year has been very typical in terms of the volatility that markets have experienced historically. Though indicators pointed to higher volatility this year, these periods can be challenging. When we’re prepared for it, and have a plan, we’re in a better position to make good decisions despite increased uncertainty. Maintaining a long-term plan and avoiding the urge to react strongly to short-term market swings are very important, as is focusing on the many fundamentals supporting growth in the economy and corporate profits, rather than allowing speculative headlines to alter one’s long-term investment plans.

To prepare for the year ahead, please stay tuned for the LPL Research Outlook 2019 publication, due out in mid-December. This publication provides valuable insights and guidance to arm investors for what may occur in the future, including the big themes to watch, LPL Research’s investment recommendations, and expectations for economic and market performance.

#MarketOutlook
#Investments
#Market Volitility
Tracking #1-800189

Why the U.S. Might Be Less Affected by a Trade War

The nature of our economy could help it withstand the disruption.

A trade war does seem to be getting underway. Investors around the world see headwinds arising from newly enacted and planned tariffs, headwinds that could potentially exert a drag on global growth (and stock markets). How badly could these trade disputes hurt the American economy? Perhaps not as dramatically as some journalists and analysts warn.1,2

Our business sector may be impacted most. Undeniably, tariffs on imported goods raise costs for manufacturers. Costlier imports may reduce business confidence, and less confidence implies less capital investment. The Federal Reserve Bank of Philadelphia, which regularly surveys firms to learn their plans for the next six months, learned in July that businesses anticipate investing less and hiring fewer employees during the second half of the year. The survey’s index for future activity fell in July for the fourth month in a row. (Perhaps the outlook is not quite as negative as the Philadelphia Fed reports: a recent National Federation of Independent Business survey indicates that most companies have relatively stable spending plans for the near term.)1,2

Fortunately, the U.S. economy is domestically driven. Consumer spending is its anchor: household purchases make up about two-thirds of it. Our economy is fairly “closed” compared to the economies of some of our key trading partners and rivals. Last year, trade accounted for just 27% of our gross domestic product. In contrast, it represented 37% of gross domestic product for China, 64% of growth for Canada, 78% of GDP for Mexico, and 87% of GDP for Germany.3,4

Our stock markets have held up well so far. The trade spat between the U.S. and China cast some gloom over Wall Street during the second-quarter earnings season, yet the S&P 500 neared an all-time peak in early August.5

All this tariff talk has helped the dollar. Between February 7 and August 7, the U.S. Dollar Index rose 5.4%. A stronger greenback does potentially hurt U.S. exports and corporate earnings, and in the past, the impact has been felt notably in the energy, materials, and tech sectors.6,7

As always, the future comes with question marks. No one can predict just how severe the impact from tariffs on our economy and other economies will be or how the narrative will play out. That said, it appears the U.S. may have a bit more economic insulation in the face of a trade war than other nations might have.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.Citations.

1 – reuters.com/article/us-usa-economy/us-weekly-jobless-claims-hit-more-than-48-and-a-half-year-low-idUSKBN1K91R5 [7/19/18]
2 – nytimes.com/2018/07/24/upshot/trade-war-damage-to-us-economy-how-to-tell.html [7/24/18]
3 – money.cnn.com/2018/07/25/news/economy/state-of-the-economy-gdp/index.html [7/25/18]
4 – alliancebernstein.com/library/can-the-us-economy-weather-the-trade-wars.htm [7/17/18]
5 – cnbc.com/2018/08/06/the-sp-500-and-other-indexes-are-again-on-the-verge-of-historic-highs.html [8/6/18]
6 – barchart.com/stocks/quotes/$DXY/performance [8/7/18]
7 – investopedia.com/ask/answers/06/strongweakdollar.asp [3/16/18]

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The Turkish Currency Crisis

A look at why it matters so much to the world, and the risk of a domino effect.

The collapse of the Turkish lira has become a major financial story. You may wonder why the financial media is devoting so much space to this, as Turkey is not exactly China or Japan or Germany. The fear is that Turkey’s problem hints at a greater crisis.1,2

Globally speaking, Turkey is not all that minor. Its economy is the world’s seventeenth largest, and while it is seen as an emerging market, it is also in the trade orbit of the European Union. Turkey does not yet belong to the E.U., but it trades heavily with E.U. countries: it ranks fifth among importers to the E.U. and represents the fourth-largest E.U. export market.1,2

Stubbornness. Nepotism. Incompetence. These are the words associated with Turkish monetary policy of late. After his reelection, Turkish President Recep Tayyip Erdogan called interest rates the “mother and father of all evil” and made his brother-in-law the nation’s finance minister. Stunningly, the nation’s central bank then announced it would not raise interest rates, bucking a global trend. (A rate hike finally happened in July.) The Turkish lira has lost 40% of its value versus the dollar this year, and it fell 18.5% in a day following President Trump’s August 10 vow to double U.S. tariffs on Turkish steel and aluminum imports.3,4

Turkey’s current monetary policy is ill-timed. The dollar is getting stronger and stronger versus other currencies, mainly because the Federal Reserve is raising interest rates and unwinding its $4.5 trillion portfolio of government securities in response to a healthier economy. The majority of Turkey’s debt is dollar-denominated – and like many developing nations, it uses local currency to pay off dollar-backed debts.3,4

What if Turkey’s currency implosion is just the tip of the iceberg? This is the major question bothering economists and institutional investors. Argentina owns a great deal of debt priced in dollars. Did you know that the International Monetary Fund gave Argentina a $50 billion bailout in June? Did you know that the benchmark interest rate in Argentina is currently 45%? Its peso dropped to a record low in early August. South Africa, Russia, and Mexico have also seen their currencies slip recently.3

In the worst-case scenario, something like the 1997-98 global currency crisis occurs. In July 1997, Thailand had to devalue its currency, the baht, to a record low. Over the next year-and-a-half, Malaysia, the Philippines, China, Hong Kong, Indonesia, and South Korea all faced financial emergencies; the Dow had its two worst trading sessions in history, with drops of 554 and 512 points; leading Japanese banks and brokerages collapsed; the IMF had to loan $23 billion to Russia, $57 billion to South Korea, and $40 billion to Indonesia; Russia’s stock market cratered; Japan went into a recession for the first time since 1975; and according to the IMF, world economic growth was reduced by about 50%.5

You can see why investors, economists, and journalists might be concerned about the currency crisis in Turkey. It is worth pointing out that the U.S. came through that 1997-98 global crisis relatively unscathed, though, as always, past performance is no guarantee of future results.5

Hopefully, what is happening in Turkey will not prove to be the first act of a drama for the global economy. If it is, fast action may be required by the IMF, the World Bank, and central banks to restore confidence in the markets.

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – nasdaq.com/article/market-slides-on-turkeys-troubles1-cm1007145 [8/14/18]
2 – ec.europa.eu/trade/policy/countries-and-regions/countries/turkey/ [4/16/18]
3 – money.cnn.com/2018/08/14/investing/turkey-lira-emerging-market-crisis/index.html [8/14/18]
4 – marketwatch.com/story/3-reasons-why-the-selloff-in-turkeys-lira-matters-to-global-markets-2018-08-10 [8/10/18]
5 – pbs.org/wgbh/pages/frontline/shows/crash/etc/cron.html [11/17/15]