Early in the summer, we had the prospect of “Italeave” as a populist party took control of Italy. We also had the start of the tariffs and trade wars, which have rattled the markets all summer. Then, the yield curve approached inversion, typically a signal of recession. There were reports that the deficit would soon be approaching $1 trillion. Plus, the housing market started to roll over on higher prices and rising interest rates. Finally, we had the Turkey crisis, which looked like it might morph into a general emerging markets crisis. We had more news this summer than in a typical year—and that leaves out the domestic U.S. political battles, which also rattled markets.
Despite all the worries and the news, markets continued to climb (at least here in the U.S.) to reach new all-time highs. Strong economic growth, repeatedly cited by the Fed; strong business and consumer confidence; and continued job creation all combined to keep the economy moving. We got repeated boosts, in fact, as worries failed to materialize. Italy did not threaten to leave the EU. Tariffs and trade wars have not led to general collapse. The yield curve has not inverted. The deficit is rising, but it has not affected interest rates. Turkey did not turn into a general crisis. And, most recently, the signing of a trade deal with Mexico suggests that that worry may subside as well.
As usual, many of the things we worried about simply didn’t happen. If we had spent the summer at the beach, we would have been better off. Lesson for the future! What, however, does this tell us about the fall? Should we head somewhere warm and ignore the news? Probably not.
We do have news coming up this fall that will likely challenge markets—and in a more sustainable way than we saw this summer.
First is the change in interest rates. With the Fed poised to raise rates two more times this year, a yield curve inversion is looking much more likely. With the deficit poised to actually crack $1 trillion sometime this fall, government finance will be back on the plate as well. And, the big one, with the midterm election season starting up next week, politics will become even more disruptive. It will be a busy fall.
Arguably, though, all of that can be dismissed as noise, just as things turned out to be this summer. The real news to watch will be economic. Does housing continue to slow? Do the tariffs actually start to do real damage, both to growth and to confidence, as they intensify? Does hiring slow further? All of these factors are what really determines how the economy acts and, therefore, what the financial markets do.
In other words, the fall is likely to be every bit as busy as the summer has been, maybe more so. Plus, the tailwinds that have kept us going during the summer may be fading. This is one of the things we need to watch.
Any way you look at it, we live in interesting times. I don’t think I will be writing about lobster rolls this fall, either.