What's going on with the market? (Week1)
- Interest rates
- China Tariffs
- Double bottom?
With the midterm election in the rear view mirror, there are really 2 factors driving the market right now. Interest rates and china tariffs.
Right now I think that the interest rates are the primary driver for the market. When the market first started it's downturn on Sept 26th, it was triggered by the Fed meeting where Powell announced that he will raise again in December and is planning on 3 more raises in 2019. This scared the shit out of the market. The reason it scared people is simple. When interest rates climb the economy slows. Higher Fed interest rates means higher mortgage interest rates. Think about it like this, if you took out a 30 year mortgage for $200,000 at 3.25% (pretty normal rate about 2 years ago), you would pay $870 a month and $313,349 in total (and that's without the property tax). No as interest rates climb we are looking at more like 5% or even 6% or 7%! So let's run the numbers there... if you took out a 30 year mortgage for $200,000 at 5.12% (current rate as I am writing this today), you'd pay $1,088 a month and $391,809 in total. So that's $78,460 more you'd have to pay, that's a brand new Tesla model S... Now that's only at the current interest rate...imagine if the Fed raises the rates 4 more times...scared yet?
The market fear over interest is tangible if you look at the vix (an index the measure volatility and is used to judge overall market fear). On the chart below of the vix over the past year you'll see the original spike in the vix in February when the Fed just started talking about more interest rate hikes on January 30th and 31st. Then you'll see the spike in the vix lining up almost perfectly with the Fed meeting at the end of September.
Now there is something that could save us here...Powell. Jerome Powell (the Fed chairman) speaks tonight at 5:15pm. If he could just give us a little bit of dovish sentiment then I think the market will soar. More specifically if he would just say that he will raise in December, and then simply watch the data for future raises, I think the market would relax a bit allowing it to sprint uphill.
Ok, let's put the interest rates aside for a moment and talk china tariffs. (Hard to do right? especially now that you're thinking about that $70,000 Tesla that you're mortgage will cost you...) Regardless the china tariffs are weighing on the market. The tariffs are not only dragging down the Chinese economy, but also all the companies in the US that do business in China. Most notably Apple. Though Apple was exempt from the initial 250 billion in tariffs, it seems as though we are headed to a place where Apple will be paying an additional 25% on all the products they ship in from China. A tariff like that will increase prices on Apple devices -> likely reducing sales -> lowering profits for all US companies doing business in China. Lower profits generally equal lower stock prices.
The good news is that we may have a light at the end of the tunnel. Trump is headed to a summit at the end of November where he has a meeting scheduled with Chinese President Xi. The build up to this meeting should lift the market and if we get a deal between the US and China we should see huge gains in the market...but probably not for long. Even if we get a deal with China we likely will be dragged back down by interest rates. For me a deal with china would mean a chance to get back in the black for the year and then sell out and wait for interest rates to cool.
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