Through the end of September, the economy as a whole stayed strong. Global markets have mostly recovered from the decision by the United Kingdom to leave the European Union thanks to the recovery from emerging market countries such as Brazil and China. The United States’ economy is growing as well.
We’ve seen utilities, real estate and high-yielding stocks in the U.S. prosper from the current low-yield environment. Valuations for most of these stocks are rising which is worrying some investors. To further drive these worries, the Federal Reserve may raise interest rates again in December. However, the real focus will be on the ability for these high valued stocks to continue to grow. Historically, a short-term rise in interest rates has fueled an ongoing bull market, and we expect further growth in the stock market and the economy for some time. On another positive note, the odds of a recession are low as unemployment is decreasing as more and more people are returning to the workplace.
Consequently, the low interest rate environment is negatively affecting banks. Standards for loans have changed with recent reform over the last several months and productivity has slowed due to rising wages and lower unemployment. Many banks have been pushing customers to open lines of credit in hopes of squeezing out extra profits. For energy, various countries have agreed to lower oil production, which has been the main reason the cost per barrel of oil has been rising this year. Since demand for oil has not decreased, less inventory means an increase in price. Price increases directly benefit oil companies and have traditionally been an indication of a growing global economy. We see this trend continuing.
The overall bond market has also fared well this year, contributing to a portion of the returns for client portfolios. Inflation expectations are rising, but with a slow increase in rates from the Federal Reserve, we are not immediately concerned with inflation due to our short-term focus for portfolios holding bonds. Historically, stocks outperform bonds and when interest rates rise, bond prices fall. We are confident that our portfolios are well diversified to withstand various levels of market stress and have the appropriate levels of risk in a volatile market.