Even though the Nasdaq and the S&P 500 are reaching all-time highs as Amazon (AMZN - Free Report) , Alphabet (GOOGL - Free Report) and Apple (AAPL - Free Report) rally, it doesn’t mean stocks will continue to climb in September. Historically, stocks suffer in September during a bull market period. This year, with issues such as interest rate hikes, trade disputes and Iranian sanctions, stocks might be impacted even more.
The Fed is expected to raise interest rates for the third time this year in September, to help prevent inflation and the overheating of the economy. Two side effects of the Fed’s rate hikes are a rising dollar and flattening of the yield curve.
The U.S. dollar has been very strong recently. A rising dollar can be a side effect of the Federal Reserve’s interest rate hikes. A strong dollar can have negative impacts internationally. It contributed to the emerging markets’ slowdown that was already aggravated by U.S. tariffs. China has been suffering through a bear market with the Chinese yuen extremely weak against the U.S. dollar. Similarly, the Turkish lira and a weakening Argentinean peso are also very weak against the dollar.
Another worry, alongside the increase in the short-term rate, is the possibility of inversion of the yield curve. Ideally, the long-term rate is higher than the short-term rate. However, if the long-term rate doesn’t move higher when the short-term rate increases, then eventually, the difference will become so meager that the yield curve will flatten or even get inverted. The inversion of the yield curve is an important indicator of a looming recession.
Despite the bull market and a robust U.S. economy, trade wars and tariffs have remained big uncertainties. Ever since the trade threats began earlier this year, investors and companies could never be sure when another round of tariffs would be imposed and how companies and markets might be impacted.
Although President Donald Trump has been making efforts to amend trade disputes with the European Union, Mexico and others, threat still remain, especially with China. On Thursday, Mr. Trump said he would impose additional tariffs on $200 billion worth of Chinese imports. China has said it would possibly retaliate on another $60 billion of U.S. goods.
As of now, the trade war hasn’t affected the entire economy or markets. Instead, the specific industries that the tariffs are aimed at have been negatively impacted. However, if the U.S. and China continue their dispute, the impact of the trade war could spill over a wider range of industries.
Although the “new” NAFTA with Mexico and U.S. is well underway, with a possibility that Canada might join, there is still a risk for 25 percent tariffs on European autos threatened by Mr. Trump.
U.S. Sanctions On Iran Oil Exports
The price of oil has been high this year due to many geopolitical factors. The biggest one is the U.S. sanctions on oil exports from Iran, which is the fifth biggest oil producer in the world. Due to undersupply issues, the price of oil has been soaring. The White House has twice enforced the sanction this year, the most recent one being the U.S. prohibiting other nations from doing business with Iran. And some companies have already announced that they will stop dealing with Iran. This sanction will not only continue to affect the global supply and price of oil, but also intensify tensions between the U.S. and the five countries that remain in the Iran nuclear deal.
With so many major geopolitical and economic factors at play, traditionally rocky September might be even worse for stocks.
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