A August Overview
The markets have stalled a bit late in the summer but, as we have been communicating for the last several months, we have been expecting a corrective phase. It’s been well over a year since the stock market went through a normal correction and stocks have looked “tired” for the last several months. As well, August and September tend to show poor seasonable performance.
Moving forward, there are two economic question marks that will determine the longevity of this economic expansion in the coming quarters and years:
- How fast does the economy re-inflate? – Around the world, central banks have been lowering rates for years, because inflation has been low and the greatest threat we faced was deflation. But, as we have seen in the US, rates are now on the rise. The “pace” of those rate increases will be directly affected by inflation. If inflation stays low, rates will rise slowly. If inflation heats up, the central banks will be forced to raise rates faster, which would be unfavorable for stocks.
- Will the global economy continue to improve? – For years, the US economy has pulled the rest of the world higher. In reality, Europe has been in borderline recession for the last ten years. That being said, the US economy has had to do the heavy lifting. This year things changed. Europe and China are growing and Japan has shown good economic numbers. So, if countries around the world continue to support the global growth effort, this rally could become sustainable.
Keep in mind, we have not turned bearish on the markets, we simply feel that the markets are in the process of taking a breather. In reality, the global economies are lifting right now and earnings have been strong. This is a very positive scenario and one we think will push markets higher over the coming years.