There is a famous saying about financial markets this time of year, which is “Sell in May and go away.” This old Wall Street adage advised investors to sell their stocks in the spring and stay out of the market during the summer months to avoid historically weaker performance.
However, while historical data has often shown that markets tend to hold true to this adage, with the rest of the year outperforming Summer, financial experts generally advise not to act on this rhyme. The reasons for this include that trying to time markets often results in missed rallies (for example, the S&P is up 7% from May 1 to June 15 this year) or you can miss out on key events that might impact your returns in the short- and longer-term. There are three important ongoing/upcoming news events that are in the headlines this week that could have a significant impact not only on financial markets, but also on your spending ability.
- Event #1 – US-Iran “Peace Deal”: Late last week and early this week, the United States and Iran came to an agreement in principle to end hostilities that started on February 28. President Trump and Vice President Vance virtually signed the agreement on Monday, with the official signing scheduled to take place in Geneva on Friday. Since news of the impending agreement, worldwide financial markets have rallied, and oil price futures have plunged approximately 5% to their lowest levels since March. Therefore, the short-term financial impact of the deal looks quite positive. The opening of the Strait of Hormuz, which is scheduled immediately after the agreement is officially signed, will not only continue to lower oil prices but will also lower fertilizer prices, which should help lower food prices in the not-too-distant future.
Once the deal is officially signed on Friday, a 60-day period of negotiations will begin to hammer out more of the details of the current framework deal. One of the most important issues to be addressed during the negotiation period will be the future of Iran’s uranium enrichment program. My belief is that things will remain stable during those 60 days, which will be positive for financial markets, oil prices, and inflation. So, the short-term outlook of the economy is good. However, if limited progress is made on the negotiation front, there is a chance that hostilities can return at the end of the 60 days. However, my sense is that with the midterm elections looming in November, President Trump will continue to avoid hostilities at least until then. However, follow the situation closely to see what might happen after the midterms. Hostilities could very well return, increasing oil prices and inflation, and significantly dampening financial markets.
- Event #2 – Kevin Warsh and “The New Fed”: Kevin Warsh is the new Chairman of the Board of Governors of the Federal Reserve, having replaced Jay Powell. While there were concerns that Mr. Powell’s successor might be less independent and influenced by President Trump, both Mr. Warsh and President Trump have tried to put that concern to rest. Also, recent high inflation data has dampened any expectation of the Fed lowering rates. Mr. Warsh is leading his first Fed meeting as this column is being prepared to go to press, but you will know the result by the time you read this column. Rates are expected to remain stable for the remainder of the year, unless renewed hostilities in Iran spur inflation again, potentially necessitating a rate hike. A predictable rate environment is helpful both in terms of spending (business and personal) and investing.
Early on, the biggest anticipated difference between Mr. Warsh and Mr. Powell is that Mr. Warsh is planning on doing less “future rate signaling” than Mr. Powell. Under Jay Powell, the Fed gave significant future guidance and provided information on how all the Fed Governors were thinking. Such communication caused market expectations and movement. Kevin Warsh will be doing less of this, so you (and your financial advisor) should be paying attention to inflation and employment data very closely to have more insight as to where rates might be going in the future.
- Event #3 – Social Security Insolvency Clock Moves Up Again: Last week, the Social Security Administration announced that it expects to deplete the fund that helps pay out retirement benefits by late 2032 (moved up from last year’s estimate of 2033). Major factors that went into this changed projection were President Trump’s new tax law and decreasing numbers of future workers due to birth rate and immigration reductions. If the reserves do deplete as projected, then in 2032, Social Security benefits will be reduced by 22%. If this is the case, our economy and markets will be impacted. First, seniors will have less income, impacting their ability to spend and subsequently hurting the economy. In addition, some seniors will become more dependent on their invested retirement funds. Therefore, they will deplete their investments more quickly, reducing monies invested in financial markets that help stimulate the economy.
The good news is that when this information was announced last week, it grabbed the attention of Congress. House Speaker Mike Johnson indicated that he wanted to make Social Security reform a priority, and Senator Rand Paul quickly recommended a bipartisan committee in the Upper Chamber to address the issue. The bad news is that President Trump and some members of Congress see Social Security reform as “the third rail” of politics and choose not to touch it. My advice to you, dear reader, is to continue to build up your personal retirement assets, and also pay attention to various Social Security reform recommendations to best understand how they will impact you.
While there may have been a time not to pay attention to financial news in the Summer, this is not the case now. Understanding these three key events and how they impact you will pay dividends long into the future.
