Thoughts on the Market

In the children’s fantasy novel, Peter Pan, these are the directions to Neverland, home of Peter Pan and the Lost Boys. With investing, it is often difficult to know which star to follow as the investment horizon is ever changing, and never totally clear. In recent months, market focus has shifted among inflation, interest rates, corporate earnings, and even politics. All these items can have a profound effect on markets that must be carefully navigated. This month, we will review these points to determine the best investment path forward.

Details. Details. In the investment world, as long as the market is moving higher, data points that are deemed irrelevant are ignored until they become relevant. On August 5, we saw a large sell off in US equities after a 12% decline in Japan’s Nikkei stock index, all triggered by a rise in the yen after the Bank of Japan increased their interest rate from 0.1% to 0.25%. How does such a little thing as a 0.15% Japanese rate increase send the US market into a tailspin?

In the movie trilogy, the Lord of the Rings, the forces of good and evil battle over the fate of Middle Earth. In the investing world, the fight has been between inflation and interest rates with higher interest rates slowing the economy and bringing down the overall inflation rate. With inflation now heading towards the US Federal Reserve’s target of 2% and international inflation rates moving lower even faster, we have seen the first interest rate cuts from Canada and European Central Bank of 25 basis points. The question that presents itself is: are we finally at the beginning of an interest rate trend towards a normalized economy or will inflation again rear its ugly head as interest rate pressures are eased on consumers? This month, we will explore that question and the implications f