Dow Jones Industrial Average Sold off 833 Points or 3% on 10/10/2018 Adjusting to Rising Interest Rates

The market decline in perspective:The stock markets’ 3% decline yesterday puts the DOW back to where it was in August 2018 and is up 4% on a year-to-date basis through this morning (10/11/2018). Earlier in the year we were expecting a 6-10% gain for the U.S. stock market for 2018 which we continue to maintain based on corporate earnings growth in 2018 and 2019.  We keep in mind 2018 is following two very strong years for the stock market with gains of 14% and 20% for 2016 and 2017, respectively, as corporate earnings grew significantly.

The all-important 10-Year Treasury yield is now 3.2%, up from 2.5% at the beginning of 2018.  Economists and money managers alike have been expecting interest rates to rise for the past couple of years. Well, a rising interest rate environment is finally here.  Stock markets sell off during the early stages of rising interest rates because investors become concerned that higher rates will lead to slower economic and corporate earnings growth. Stock markets typically regain upward momentum as long as corporate earnings continue to expand.

The economy continues to be strong and is why the Federal Reserve Board (FED) believes the economy can withstand higher interest rates. The economy is expanding strongly at the 4.0% GDP level well above the 1.5-2.5% level at which the economy expanded during most of the last 10-years.  The FED’S objective with increasing interest rates is to “normalize” interest rates and not to curtail inflation at the current time. A 4.0% GDP economy and a 3.7% multi-year low unemployment rate could set the stage for inflation above the 2% FED target in the future.  And if inflation shows evidence of moving up to the 2.5-3.0% range, we expect the FED will in fact raise interest rates faster than currently expected to temper the economy’s growth and thus inflation.  This would likely put significant downward pressure on the stock market.

Rich Lawrence 10/11/2018

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DISCLOSURE:
This market update includes data we believe to be accurate. However, Lawrence Wealth Management (LWM) does not warrant or guarantee its accuracy. Opinions about the future are not predictions, guarantees or forecasts. Investing in stock and bond markets have risk that could lead to investors losing money.

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