Strong Economy & Interest Rate Effects

By Dean Barber

October 5, 2018

It’s October 3rd as of writing this, and we’re officially into Fall.

It’s been a hot summer for the markets with most of the major indices trading at record highs, with a few exceptions. The economy continues to do extremely well with unemployment low and more job openings than unemployed people. Housing still remains extremely strong. Across the board whatever economic indicator you look at, it is strong.

There are three areas of weakness that we’ve had all year long, those three areas are geopolitical risk, political risk, and stock market valuations. All of these continue to be a risk, but the rest of the economy does look very solid.

Indices Performance

We started to see some pretty big variations in what’s going on in the market over the last month and I’m going start with a brief chart to show you what I’m talking about.

Figure 1 – Chaikin Analytics –

When we look at Figure 1 above, we’re looking at last month’s indices performance. The Dow Jones Industrial Average was the best performing index, up 2.94%. Following the Dow we have the S&P 100, the NASDAQ, and the S&P 500 which is up just 0.88%. That’s a big difference over a month between the Dow Jones Industrial Average and the S&P 500.

Looking at the bottom, we see the S&P 600 SmallCap down by 5.38% over the last month. The S&P 400 MidCap down 2.25% during the same period. So we have a little over an 8% spread between the large caps and the small caps.

Figure 2 – Chaikin Analytics –

If we look at this on a year-to-date basis, Figure 2, what we see is things coming together. The gold line is the S&P 600 SmallCap which had been doing extremely well and, make no mistake, it’s still good year-to-date. However, over the course of the last month, it’s gotten clobbered. I don’t think the S&P 600 SmallCap is out of steam. The NASDAQ, orange line, has continued to be the one index that has held up very well through the course of the year. A couple of months ago we discussed Alphabet, Amazon, Google, and the other big tech companies holding that NASDAQ composite up.

At this point in time, I look for continued good economic activity. I think that will continue to support the markets. We do have the November elections coming up in the near future, and we still have the geopolitical uncertainty. You may have seen that NAFTA has been replaced with a new partnership deal with Mexico and Canada. The details on that are slow to come out so far, as they do we will have something to report on that, possibly next month. That turns the focus to China and to Japan. We don’t really know what there will be on that front. I think we will see something similar to what we got with Mexico and Canada. I don’t think it’s going to be as quick, but I do think we will see some positive resolution there.


Interest Rates

The one area that’s really surprised me, and I have talked about this for the last year, is what interest rates have done. We have seen this economic expansion go long enough. GDP numbers, growth numbers, and the overall economy are pushing 4% quarter over quarter. These are numbers that are finally causing the 10 Year Treasury to move up. I’m now looking at this thinking, “Man, is my prediction going to be wrong?” My prediction was that we would end the decade with the 10 Year Treasury somewhere between 2.5-3%. Well, I’m wrong right now because that 10 Year Treasury is at almost 3.2% as of October 3, 2018. That’s a pretty big jump from where is was earlier this year.

Figure 3 – U.S. Treasury –

Looking at Figure 3, the chart covers treasury yields on January 2, 2018 on the blue line and October 3, 2018 on the green line. The 10 Year Treasury began the year at 2.46% and as of October 3, 2018 it’s at 3.15%. A pretty dynamic increase on the 10 Year Treasury. We see the biggest spread on the 3 Year Treasury up from 2.01% in January 2018 to 2.94% on October 3rd. We are seeing the flattening of the yield curve that people have been talking about and that is a sign of as strong economy. Looking at the shorter rates, the 1 Month Treasury, is up from 1.29% to 2.15%.

I had thought that we would continue to see that 10 Year Treasury hold steady around 3%, and we could finish the year there I’m not really sure. If this economy continues the path that it’s on and we continue to see the GDP numbers that we’re seeing I believe that the 3.15% on the 10 Year Treasury we looked at today could get up in the 3.25% range. Maybe even finish the decade around 3.5%. I don’t think we’ll go much above that 3.5% mark.

There are still some rate increases out there that’s caused pressure on fixed income. We’re staying on top of that and some adjustments in the types of bonds that we own inside of our portfolios. We’re always keeping an eye on all of the things going on in the economy. The most important thing that you can do is to talk to your advisor to understand what’s going on with you personally, understanding how things fit into your overall financial plan, and making sure we’re still on the same page so we can keep you on track to live your one best financial life.

If you have questions about your retirement plan or just want to make sure you’re on track, reach out to us at 913-393-1000 or schedule a complimentary consultation below. 

Thanks for being with me today.

Dean Barber
Founder & CEO

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The views expressed represent the opinion of Barber Financial Group an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Barber Financial Group does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.