The Northern Star 11/12/18 The Impact of Oil and Elections

Message form Jon

Market Update

On the other side of the elections, the markets appear to be rebounding off of their horrible, no good, despicable month of October. With the election now firmly behind us, we saw a rapid and quite impressive Wednesday with each index establishing a 2+% rebound. Thursday saw a hesitant market as the Fed indicated they would continue to raise the rates in December to help offset a growing economy & risk of inflation. 1,2

We realigned portfolios to reflect a higher probability that we will see a year-end rebound after seeing October's unexpected and sudden decline in equities. In my opinion, we SHOULD experience little headwinds from now on thru the end of the year and possibly into early 2019, but by mid to late 2019-early 2020 is when it gets foggy...very foggy.

We have had an unusual year, but as I had previously stated, it was an expectation and therefore should not be a surprise to anyone at this point. We are still seeing some incredible volatility and uncertainty that is unfolding in the markets, but this too will pass, and one day or even one week does not make an investment strategy long-term.

Emotions tend to run hot and high whenever the markets run soft or at a loss. As I have said in the past, MANY, MANY times...emotions and money make poor bedfellows and should never be mixed! It's like going to the grocery during a fast, not a good idea because your logic is clouded, and your decisions are tainted. Times like these are the reason why average investors underperform over the long-haul. To give you an idea, Warren Buffett is not buying anything at the moment except his own shares back, and he has 100 Billion bucks! 3

When we experience a crash...AND WE WILL, those who keep control of their emotions are going to win. We will focus on the why and what for (Needs, Wants & Wishes), while keeping an eye on the ground underneath our feet (indicators and data). At this point, we are still seeing a long-term favor on equities and a short-term emphasis on defense and conservation, which is why we have made moves to higher ground but not out-moves to reallocate but not to relocate and our eyes on the horizon.

Time will certainly tell.

Jon

Sources:

1. https://www.reuters.com/article/us-usa-fed-instant-view/fed-holds-rates-steady-sees-economy-on-track-idUSKCN1ND2WW?feedType=RSS&feedName=businessNews&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+reuters%2FbusinessNews+%28Business+News%29
2. https://www.bbc.com/news/business-46129250
3. https://www.washingtonpost.com/business/economy/warren-buffetts-100-billion-problem

Last week, markets experienced a 4-day winning streak before dropping on Friday, November 9. Despite those losses, domestic indexes posted gains for the week.[1] The S&P 500 increased 2.13%, the Dow added 2.84%, and the NASDAQ was up 0.68%.[2] International stocks in the MSCI EAFE had slight growth, ending the week up 0.20%.[3]

From interest rates to corporate profits, investors had a number of topics to consider.[4] In this update, we want to focus on two key details that drove markets: oil prices and midterm election results.

1. Oil Prices Declined

Oil prices continued to fall last week, posting the most consecutive daily declines in at least three decades.[5] In fact, West Texas Intermediate (WTI) futures, a key oil benchmark, is officially in bear market territory. WTI has fallen more than 20% below its highest point over the past year.[6]

What does this drop mean for markets?

Some investors believe the price declines are another sign that the global economy is slowing down. Historically, people have used oil prices as one way to decipher economic health because they can correlate with global growth. When crude oil prices drop, greater economic challenges are often ahead.[7]

This recent decline may have a less concerning explanation. The United States sanctioned Iran last week while allowing eight nations to continue buying oil from the country for now.[8] All of these waivers resulted in 1 million more barrels of Iranian oil being on the market than expected, the opposite of the anticipated tightening supply.[9]

Bottom line:The oil price decline may be more of a symptom of disrupted supply and demand, rather than an indication of the global economy's health.[10]

2. Midterm Elections Brought Few Surprises

The long-awaited midterm elections occurred last week, and the results matched expectations for a split Congress.[11] These results contributed to the midweek market rally we experienced.[12]

How could the results affect markets?

Post-midterm market results are generally strong. Over the past 18 midterm elections, stocks have always had positive returns from their lows in October to the year's end. Some investors even believe that October's struggles were a sign of the markets pricing in the election results about a month early.[13]

Taking a historical, long-term view, the current arrangement of a Republican president and a split Congress has resulted in 12% annual returns since 1936. The chart below shows how markets have performed through each potential party-control scenario.[14]

Although stocks have often done well when Washington experiences gridlock, the current scenario also makes a government shutdown or increased investigations into President Trump more likely. With either of these actions, market volatility could follow.[15]

Bottom line: The election results could help bolster market performance. The split Congress also brings potential for political uncertainty that increases volatility for investors.[16]

In many ways, this week's market behavior underscores the complex, interconnected relationships between geopolitics and the markets. If you have any questions or would like to dive deeper into how these situations affect your financial life, we're here to talk.

• Monday: U.S. Holiday: Veterans Day observed
• Tuesday: CPI
• Thursday:Retail Sales, Import and Export Prices, Business Inventories, Jobless Claims
• Friday: Industrial Production

Sources: