5/23-5/27/16 Charts of the Week

After a week off, we are back at it with our Charts of the Week! Financial markets are gearing up for a possible interest rate hike in June, with the CME Group’s FedWatch tool currently forecasting a 30% chance of a June hike and a 60% chance of a July hike. The Fed finds itself between a rock and a hard place; FOMC members have been calling for gradual rate hikes for over a year, only to raise interest rates once in December of 2015 after 7 years of near 0% rates.

One of the unfortunate side effects of rate hikes is a strengthening currency. Even though the US Dollar Index (DXY) has been declining over the last 6 months…

6moDXY

The DXY has been in a bull market since 2011. A strong Dollar has made it incredibly difficult on businesses that sell goods and services overseas, as those goods and services become more expensive to consumers holding Yen, the Euro or the British Pound Sterling. The Fed needs DXY to decrease in value not only to bolster the US economy, but also to hit their inflation target, which has been a difficult task over the last 24 months…

40yrDXY

Investors will be waiting with baited breath to see what the FOMC decides in mid-June, but we expect some significant market volatility in the meantime.

We are beginning to see more headlines regarding household debt, and not in a good way. For example…

Auto-credit delinquencies

The chart below was taken from a blog post by Mauldin Economics’ Tony Sagami detailing US household debt. As you can see, over the last decade, households have taken on an excessive amount of student loan debt, and auto loans have increased significantly as well, while credit card debt has declined. Debt is often a financial 4-letter word, but debt is never the problem, it is the inability to service debt that is the true problem. As long as wages continue to grow (or inflation destroys the purchasing power of the dollars used to repay loans), then the consumer is in good shape. However, taking on too much debt also means fewer dollars to spend on consumer goods, which can mean bad news for the economy.

household debt

The increasing student debt becomes especially worrisome when we look at savings account balances according to GOBankingRates.com…

savings account balance

Nearly 50% of those surveyed have no savings whatsoever. In the event of an emergency, investors need liquid cash available at a moments notice, whether it be for a medical purposes, a home repair, or any other number of instances. While we are in the business of putting capital to work for clients in financial markets, we believe that everyone should have some cash stuffed away for emergencies that you can access immediately.

The last chart for this week shows how investors behave at different points during market cycles…

Market emotions

Investor psychology is an amazing phenomenon. It never ceases to amaze us how many investors will make poor decisions while following a herd mentality, just for the sake of feeling good. The goal of any investor (or investment advisor) should not be to chase short term gains near the top of the curve, but to buy near the point of “pessimism” or “skepticism” at the bottom. In reality, most investors buy near “thrill” and sell near “capitulation.”

At Treece Investments, we understand that navigating financial markets can be a strenuous and difficult task, and investors should not have to go through it alone. If any of our readers have questions about our investment strategy, the services we provide, or would like more information on how to become a client, we encourage you to reach out to us via our Contact Us page, our consultations are always free of charge.

 

Happy trading!

Ben Treece is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and licensed with FINRA (www.Finra.org) through Treece Financial Services Corp. The above information is the opinion of Ben Treece and should not be construed as investment advice or used without outside verification.
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