In our last newsletter we alerted our clients that there were long-term challenges to the markets due to high prices for stocks and rising interest rates. We have recently seen a degree of volatility unseen for well more than a year. We would like to share some thoughts with you about why now is not the time to panic.
With half of S&P 500 companies reporting earnings, “roughly 80% have beaten Wall Street’s revenue expectations. That is the highest percentage since at least the third quarter of 2008.”
Rising interest rates are largely the result of a global increase in rates and economic performance. In other words, global prosperity.
Even as rates rise, they will still be historically low.
The market selloff is the result of good news on employment and wages. We don’t see this as changing the size or frequency of rate increases. At least not yet.
Real bear markets are typically the result of a weak economy accompanied by high levels of debt. Consumer debt is relatively low when compared to 2008, while bank balance sheets worldwide are much stronger. It is when people run out of cash and borrow to keep asset prices high that real trouble is brewing.
In the near-term, the biggest issue is how do the world’s central banks reduce their balance sheets? The long-term issue is the difficulty of maintaining growth in our clients’ portfolios so that they can earn returns sufficient to meet their spending needs. For many of our clients, higher interest rates mean better cash flow. For pension plans, which are in much better shape now than ten years ago, higher interest rates make it easier for them to meet their obligations to their retirees.
Rest assured, we are monitoring the situation.