In this past weekend’s newsletter, I discussed the fact the markets had finally awoken to the reality that rates have once again broken above 3%.

“Speaking of rates, each time rates have climbed towards 3%, the market has stumbled.”

However, I also noted that on a very short-term basis, the market was oversold enough to generate a bounce. Importantly, with market testing the January breakout highs this is a “make or break” point for the markets. There are two things currently that are worth paying attention to from a portfolio management standpoint.

If we add interest rates to the equation we can see where rising rates have contributed to a pickup in volatility in the equity market.

So far, the markets have been able to fend off the impact of higher rates and tariffs on the back of strong earnings results and the strength in the economic data.

However, those two things are coming to an end.

As I discussed in “Debts & Deficits”, much of the economic “boom” has been derived from a massive boost in fiscal spending due to a series of natural disasters last year.

“While the markets have been the beneficiary of the tax cut legislation, which gave a short-term boost to corporate profitability, the economy has enjoyed a boost from the massive increases to spending from what should have been more aptly termed the ‘Bipartisan Non-Budget Act of 2018.’ Spending on natural disasters and defense spending increases ‘pull forward’ future economic growth which is an illusion of an economic turn.

 Currently, the government is running one of the largest deficits, in both dollar terms, and as a percentage of GDP, in history.”

As the spending on natural disasters slows down by the end of the year, the surge in the deficit will begin to erode economic growth going into 2019. With the rise in rates, combined with higher oil prices, weighing on consumption growth, particularly as higher rates slow housing, auto sales, and increases debt payments, the impact to the economy will likely show up sooner than anticipated.