Vorisek Financial Weekly Market Update for June 20, 2018

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Good morning!

If the 2007-08 US economy was a “patient” in free-fall, the “medicine” provided by the Federal Reserve was to reduce interest rates to historically low levels to stimulate borrowing and spending by American consumers.  The action, unprecedented in our nation’s history, kept the cost of borrowing at near zero for 7 years until December 2015.  In the subsequent 2 ½ years, the Fed has raised short-term rates 7 times (including last week’s rate hike) and has signaled another 5 possible rate hikes by the end of 2019.  Their logic: the “patient” is now experiencing accelerating growth and rapid job creation, causing the Fed to turn its concern to the possibility of rising inflation and its inherent problems (source: BTN Research).                   

The spread between the 10-year Treasury note yield and the 2-year Treasury note yield fell to just 35 basis points last Thursday 6/14/18, i.e., 2.94% less 2.59%, the tightest spread between the 2 debt instruments since 8/27/07 or almost 10-years ago.  Some, but not all market watchers believe that if expectations for interest rates for the next 2 years are growing, but not expectations for the next 10 years, the implication is that the bond market thinks the Fed will go “too far” in raising short-term rates, leading to a slower US economy and thus lower yields on the longer-end of the curve (source: BTN Research).  

Oil production in the United States reached 10.9 million barrels per day for the week ending 6/08/18, the highest level recorded for our country per records that have been maintained since 1920 or nearly a century ago.  Oil production 10 years ago (June 2008) was just 5.1 million barrels per day (source: US Energy Information Administration). 

Notable Numbers for the Week:

  1. TO AGE NINETY - 25% of Americans that reach age 65 will live at least another 25 years to age 90 (source: Social Security Administration). 

  2. LOTS OF RULES - Medicare covers the cost of 100 days of care at a “skilled nursing facility.”  A new 100-day benefit clock begins if the patient has gone 60 days without requiring a “skilled level of care” (source: Medicare).  

  3. SURPRISE - 23% of households headed by individuals at least age 75 will experience an “extraordinary” out-of-pocket medical expense of at least 1% of household income this year (source: JP Morgan Chase & Co. Institute). 

  4. A FORCE - China has more millennials (400 million) than the population of the United States (328 million).  Millennials were born between 1981-97 and are age 21-37 in 2018 (source: Financial Times).

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