Let’s talk Turkey. How did a country that represents just about 1.4 percent of the world’s economy spark a global selloff? Turkey was once a rising star. The country’s Prime Minister Recep Tayyip Erdogan took office in 2003 and his “conservative, pro-business policies helped pull the country back from an economic crisis,” reported Financial Times.
As Turkey’s economy strengthened, investors saw opportunity. Investments from outside the country averaged about $13 billion a year, according to World Bank figures cited by Financial Times, although investment slowed after terror attacks in 2015.
Bloomberg reported Prime Minister Erdogan has become more authoritarian since being re-elected in 2018, giving himself power to name the head of Turkey’s central bank. Financial Times reported the Prime Minister’s “…unorthodox views on interest rates…has proved disruptive for monetary policy, leaving…Turkey’s central bank, struggling to contain inflation that is running at close to 16 percent.”
Lack of central bank autonomy concerned investors. The Turkish lira began to weaken against the U.S. dollar, making it costly for Turkish businesses to repay dollar-denominated debt.
Politics have factored into the situation, as well. During 2018, negotiations were underway to secure the release of an American pastor who was arrested on “farcical terrorism charges,” reported The Economist. However, talks collapsed early in August. Asset freezes and sanctions followed, along with promises of additional tariffs on Turkish goods imported by the United States.
The subsequent steep drop in the value of Turkish lira sparked concerns that rippled through global markets. Financial Times reported:
“Turkey’s deepening crisis punished emerging market currencies and sparked a global pullback from riskier assets on Friday…The S&P 500 fell 0.7 percent in New York on Friday. Treasury yields also moved lower, with the 10-year dipping below 2.9 percent for the first time this month, as investors sought safe assets…Investors’ shift from risky assets knocked equities across Europe, with Germany’s Dax, France’s CAC 40 and Spain’s Ibex all about 2 percent weaker.”
For quite some time, investors have appeared immune to geopolitical risks. Perhaps that is beginning to change.
The U.S. Consumer Price Index (CPI) was released for July showing a gain of 0.2 percent and an annual gain of 2.9 percent. The core CPI posted an annual gain of 2.4 percent, the largest year-over-year gain since 2008. The recent report strengthens the possibility of two more rate hikes before year’s end as the Fed’s target rate is 2 percent. Much of the gains in the CPI can be attributed to the rise in input costs as tariffs have raised prices of materials such as lumber, aluminum, and steel. This rise is exemplified in the shelter index as its annual rate is 3.5 percent. The chart above shows the monthly CPI rates over the last 12 months.
The Federal Reserve Bank of New York has released their August 2018 recession probabilities. Of note, the forecast for a recession occurring in the next twelve months has risen to the highest level since 2006. They are currently forecast a 13.6% chance of a recession starting by August 2019. However, that also means there is an 86.4% chance that there will not be a recession in the next 12 months.
According the Bespoke, the NFIB U.S. small business optimism index rose to a new high in July of 107.9. This is the second highest monthly reading on record, only exceed marginally by the record high of 180.0 in September 1983, almost 35 years ago. The biggest negative in the report is employers finding qualified skilled labor. Approximately, 23% of all small businesses listed this issue as their most important problem. Historically, above average readings for NFIB small business survey have led to below average stock market returns.
As the S&P 500 closes in on the record it reached in late January, many are wondering what will push the index to break through. The number of companies participating in the rally will likely need to be expanded. The S&P 500’s gains this year have been concentrated in a few companies primarily associated with technology, internet retail, or social media. The strong earnings in the second quarter showed broad earnings growth and a higher-than-expected number of companies that beat estimates. For the market to go higher, those fundamentals need to be reflected in stock prices.
Key points for the week
- Stocks dropped this week on concerns about the Turkish currency.
- Inflation rose 2.9 percent in the last 12 months as tariffs increased prices of many goods.
- The next leg higher in the S&P 500 will likely require a broader set of companies participating in the rally.
3 things to consider Before claiming social security benefits: timing, spousal benefits, and work status.
Most Americans understand they can choose when to begin receiving Social Security benefits. The choices are fairly straightforward:
- Early (age 62 to full retirement age). People who decide to collect benefits early typically receive a smaller monthly benefit than they would if they waited until full retirement age. The reduction in monthly income may be as large as 30 percent. However, they receive benefits for a longer period of time.
- Normal (full retirement age). An American’s full retirement age is determined by his or her date of birth. For someone born in 1960 or later, full retirement age is 67 years. The amount of income a person receives at normal retirement age is determined by the amount earned during his or her working years.
- Delayed (after full retirement age to age 70). By delaying the start of Social Security benefits, a person can increase his or her monthly benefit by accruing delayed retirement credits. For Americans born in 1943 and after, credit accrues at a rate of 8 percent each year.
While it’s important to understand timing options for Social Security benefits, choosing when to take benefits may not be the most important decision you make, especially if you’re married.
There are several different claiming strategies that may help married couples optimize their benefits and the benefits available for children who are minors or have special needs. These options should be carefully considered before filing for benefits.
Your filing decision may also be affected by your work status and income. If you file early while still working, and your earnings exceed established limits, then a portion of your benefit may be withheld. In addition, your income will help determine whether your Social Security benefit is taxable.
If you would like to discuss your options for claiming Social Security benefits, give us a call.
What are we reading?
Below are some articles we paid particularly close attention to this week. We encourage our readers to follow the links.
Over the past 10-15 years, the U.S. has gone from relying mostly on oil imports to almost becoming a net oil exporter today. This has impacts in regards to rising oil prices and the effects on the U.S. economy.
Following a systematic rules-based rebalancing strategy increases the odds of improving long-term returns. Rebalancing allows investors to maintain their desired level of risk and offset some of the negative behavioral investment biases that trip up many investors.
An odd event occurred last week in Hackettstown, New Jersey. Seventy-five goats escaped a livestock auction and were running amuck in town. If this event wasn’t odd enough, it happened a week before in Boise, Idaho. One picture from Boise shows a home’s front lawn getting snacked on by nearly 30 goats. In the words of Lou Brown from the movie Major League, “If it happens a third time it’s called a streak.” Let’s hope it doesn’t reach that point.
“Take time for all things: great haste makes great waste.”
~Benjamin Franklin, Founding Father
“Success is something you attract by the person you become.”
~Jim Rohn, American entrepreneur, author and motivational speaker
"Not everything that can be counted counts, and not everything that counts can be counted."
~ Albert Einstein, Scientist
Links & Disclaimers
RJFS and SPC do not offer or provide legal or tax advice. Tax services and analysis are provided by the related firm, S&M through a separate engagement letter with clients. Portions of this newsletter were prepared by Carson Group Coaching. Carson Group Coaching is not affiliated with RJFS, SPC or S&M. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. This information is not intended as a solicitation of an offer to buy, hold or sell any security referred to herein. There is no assurance any of the trends mentioned will continue in the future. Any opinions are those of the author and not necessarily those of RJFS. Any expression of opinion is as of this date and is subject to change without notice.
Opinions expressed are not intended as investment advice or to predict future performance. Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Past performance does not guarantee future results. Investing involves risk, including loss of principal. Consult your financial professional before making any investment decision. Stock investing involves risk including loss of principal. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock companies maintained and reviewed by the editors of the Wall Street Journal. Please note direct investment in any index is not possible.
The Russell 1000 Value Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and lower forecasted growth values. The Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. The Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The small business optimism index is compiled from a survey that is conducted each month by the National Federation of Independent Business (NFIB) of its members.
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