While stocks and bonds were mostly unchanged over the last week, the big news in the markets was that oil prices are now down 20% for the year, which Wall Street defines as a bear market (meaning prices are falling).
It's important to note that the price of oil is very volatile, often seeing large price movements, both up and down. For example, oil had a strong rally upwards in the last six weeks of 2016, gaining about 23% to end the year. What's happened so far this year is that oil has simply given back that quick gain. Oil is also near 2016's average price of $43.47 a barrel. Some analysts are viewing oil's decline as a warning the economy is about to weaken. However, Simply Money Advisors sees this move as normal for oil. Lower oil prices usually translate to lower gas prices, and right now in the Greater Cincinnati area, the average price is about $2.24 a gallon. This is higher than last week’s $2.10 a gallon, but lower than the $2.34 a gallon you were paying a month ago.
With that said, with oil down, it could be more difficult for the Federal Reserve, our nation’s central bank, to see inflation hit their target level of 2%. Currently, the markets are pricing in one interest rate hike over the next 12 months and only a 42% chance of another hike in 2017. ‘Pricing in’ simply means available economic data is already reflected in stock or bond prices. Simply Money Advisors believes the Federal Reserve will hike more than one time over the next year. We believe the market is not appreciating that the economy has strengthened in the second quarter (April, May, and June); economists are anticipating a 3% growth rate. Further, the composition of the Federal Reserve will change next year. The known new members are more inclined to prefer higher interest rates than the members that are leaving. It's also unclear as to who the next Federal Reserve chair will be, and this person will ultimately shape the Federal Reserve's view. It's possible that President Donald Trump will reappoint Chair Janet Yellen, but so far, there has been no clear guidance.
The Simply Money Point
Markets may be underappreciating the Federal Reserve's desire to raise short-term interest rates over the next year. To be clear, we expect the Federal Reserve to remain slow in raising rates, but we believe another increase in 2017 is likely. Investors like you have little to worry about. Rising rates should have little impact on your investment mix.