Where will the markets go? That is a question on a lot of people’s minds these days. With the US markets reaching all-time highs in recent weeks it seems that the US is on a roll that may be hard to stop. But what will the recent actions of the government mean for US businesses? On Thursday, June 1 the US pulled out of the Paris Climate Agreement and the next day the markets reacted with highs across the three main indexes. But what will the long-term reaction to this mean for US business trying to compete abroad?
Without being overly political in nature, this on the surface seems like a poor move on the US’s part. It was said the move was to save countless jobs and save US companies billions of dollars. The one area that is cited is fossil fuels and in particular coal. Which as an industry segment has been on the decline for at least 20 years, much earlier than the climate agreement. And then there is green technology that the US is a leader in its production. Yes, the costs are still extremely high, and with each passing year, they get much more manageable in nature. And most companies see that green technology is the wave of the future as was seen by the reaction of many of the largest company’s CEO last week. And when you compare green technology to coal the advantages of green are apparent with over seven times as many jobs in that sector as in coal. And as the US produces better and cheaper green technology more and more jobs will be created. And with this would come increased sales worth perhaps billions of dollars for US companies. Short-term this may on first look make some sense, though I do not see it, in the long-term it is a move that will ultimately hurt the US in both leadership on the world stage and in business.
And if history has anything to say about the market levels it is that you can expect a correction or an all-out bear market in the near future. Why is that? Well, the market tends to have a 10% correction on average once a year. And a bear market occurs about once every three to five years. Does that mean these highs are going away? Not necessarily no. Think back to the Great Recession and the lows we saw then. Most of the losses were gained back within two years. The same will most likely be true for the next downturn as well. The markets tend to outperform the majority of the time and are extremely resilient in nature. But as with anything, all good things come to an end, and we have been in a bull market for the better part of eight years now. At some point, history will repeat itself, and we will have a bear market. How bad it will be is anyone’s guess, but in order for there to be progress, we must experience the good and the bad.
And finally, the bond grading company Moody’s recently downgraded China’s debt. What does this mean? As it happens, not all that much really. There were some short-term effects that the markets saw, but they were corrected within a day really. China’s debt is still well within the investment grade range, so there is no imminent risk of default. But it could mean that China will have to pay slightly higher interest rates on the money it borrows. But in a closed economy, the government can take extraordinary measures to control things. But it is a fairly common belief that their economy will be slowing over the coming years and that the debt as a percentage of GDP will increase. That combined with a negative outlook on the Chinese banking system could mean some issue for them that they will have to tackle head-on in the coming years.
While no one can predict what the markets will do in the coming months or years, we can look at certain things that are happening in the US and the world in general and make some assumptions. But that is all we can do really is guess what will happen. I read and hear that the markets will crash and we will relive 2008 all over again. Then I read a slight market correction is in the near future. As you read about China’s debt downgrade, you would think it would impact things more than it did. The truth of the fact is now one knows what is going to happen, but all you can do is prepare yourself for any likely event to unfold. Diversify across asset classes and pay attention to the markets and the news that influences them the best you can. A well thought out, and diversified portfolio that encompasses many different asset classes will weather just about any condition that could happen. Could you lose money? Of course but how much is up to you and how you prepare for these things.
If you need additional information or have any questions, feel free to message me directly or leave a comment here.
