It was a wild ride this week as U.S. and foreign stocks sold off sharply on Wednesday and Thursday with a rebound on Friday.  The Dow 30 Industrials fell about 5.5% over two days rebounding about 1.15% on Friday.  Technology stocks were especially hard hit but had been some of the biggest gainers this year.  Initially the selloff may have been triggered by the rise in the 10-year Treasury interest rate last week but ironically it fell from 3.23% to 3.14% on the stock weakness.  The dollar ended the week lower and crude oil prices declined on rising U.S. inventories.

Turkey, one area of concern in emerging markets economies, released an American pastor it had prisoned supposedly for supporting the coup attempt.  Turkey had been slapped with U.S. sanctions and Turkish Lira rose sharply on Friday following the news of his release.

While the fundamentals in the U.S. have been strong, a few areas of concern helped fuel the selloff such as:

1. Concerns over additional FED interest rate increases.  It’s important to note that the FED is not signaling it is fighting inflation but rather taking a gradual approach to normalizing interest rates.  While the FED has met it’s 2% inflation target, FED statements have indicated it is willing to let inflation run a bit above that as it ran below that for so long.  The data this week still points to tame inflation.
2. Worsening trade tensions between the U.S. and China coupled with a slowdown in the Chinese economy, raised fears of a global slowdown.  It’s true that prolonged use of tariffs can really dent global and U.S. growth and that the U.S. and China are not currently talking on trade.  However, we see a significant likelihood of overtures by the Trump administration to seal some sort of deal before the mid-term elections.  If not, then possible capitulation after the election.
3. Concerns over Italy’s debt with Italy’s projected annual deficit running higher that the Eurozone’s liking.  The new political coalition has been unwilling to adopt austerity.  While it’s true that Italy is the world’s eighth largest economy and has debt at 130% of GDP we think it is likely that they will not leave the Euro currency and default which would be the worst case situation.  Looking at Greece, Spain and Portugal, they opted to stay in and work through their debt situations.

Keep  in mind that a correction of this magnitude is quite common.   We still believe that the U.S. economy will continue to grow and this cycle could last another year or two.  The household debt service ratio at 9.9% of disposable income is lower than it has been from 1980 through the financial crisis.  We believe third quarter earnings that had started to be released will be positive.  However, warnings of future earnings due to tariffs could affect some stock prices.

In the numbers this week:

• Eurozone factory output rose 1% in August from July.  For the calendar year through August, factory output has risen 0.9% from a year ago.
• The International Monetary Fund lowered its global economic growth forecast  for 2018 from 3.9% to 3.7%.  It attributed the decline to rising trade protectionism and emerging market instability.
• The Social Security Administration announced that benefits will increase by 2.8% in 2019.  Also, the amount of earned income subject to Social Security taxes will increase 3.5% to $132,900.
• The Labor department reported
  • First time claims for unemployment rose 7,000 at a seasonally adjusted 214,000.  The four-week moving average of claims rose 2500 to a seasonally adjusted 209,500.
  • The producer-price index rose 0.2% in September following two flat months.  Excluding volatile food, energy and trade services producer prices were up 0.4% in September.  From a year ago, producer prices have risen 2.6% down from a peak of 3.4% in June.  Core producer prices were up 2.9% in September from a year earlier.
  • The consumer-price index rose 0.1% in September following a 0.2% rise in August.  From a year earlier consumer prices rose 2.4% and core prices (excluding volatile food and energy) were up 2.3%.  The stronger dollar appears to be keeping a lid on prices, at this time, despite tariffs.  Prices for energy and automobiles fell in September.
  • Import prices rose 0.5% in September, the first monthly increases since May.  Imported petroleum rose 4.1% in September.  From a year earlier, import prices rose 3.5%.  Keep in mind that the import price index does not include the cost of tariffs.
  • Hourly earnings, adjusted for inflation, rose 0.3% in September but are up only 0.5% from a year earlier.
• The Energy Information Administration weekly report is here wpsrsummary.  Also, the EIA reported
• • U.S. Crude oil production rose to 11.2MM barrels per day from 11.1MM barrels per day.
  • Storage of natural gas rose 90BN cubic feet.  Natural gas storage is below the minimum for this date during the past five years.
• According to Baker Hughes, In the past week the number of active oil rigs rose 8 to 869 and natural gas rigs rose 4 to 193.

Please call us if you have any questions.

Loren C. Rex, CFP^®, AIF^®, MA                                                         Erik A Smith

President                                                                                                 Managing Partner

Generations Financial Planning & Wealth Management             269-441-4143

77 E. Michigan Ave, Suite 140

Battle Creek, MI  49017

Tel 269-441-4090

Carrie Fuce, Assistant 269-441-4091

Toll Free: 800-513-8180

Fax 866-381-2301

Visit our Website:  www.genfinplan.com

Registered Representative of and securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC.  Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor.  Cambridge and Generations Financial Planning & Wealth Management are separate companies and are not affiliated.

These are the opinions of Loren Rex and Erik Smith and are not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.  The Indices mentioned are unmanaged and cannot be invested into directly.