Something got the market rattled.
The volatility that started in February persisted through March and continued into April. Since the S&P 500 stock market index** peaked on January 26, half of the 43 trading days through the end of March entailed moves over 1%. According to Raymond James' Managing Director of Equity Portfolio & Technical Strategy, Michael Gibbs, “This contrasts to only one move of greater than 1% during 2018 prior to that peak and is a far cry from the calm seen in 2017, when the S&P 500 produced a 32-year volatility low with only eight days with moves of at least 1%”.
So what changed? Well, it's not the economy - not yet anyway. The global economy remains strong at this time, and while past performance does not guarantee future results, leading economic indicators are still trending higher, which should bode well for the rest of this year, if history is any guide. Yet markets may simply be recognizing the rise of potential economic threats, including trade policy, interest rates, and an economic cycle that is getting long in years.
Higher interest rates have been a threat for a while. Since December 2015 the Federal Reserve has raised short term interest rates six times for a total increase of 1.75%. Over that same time the 10-year Treasury rate has risen only 0.55%, and that flattening of the yield curve, bringing short-term and long-term rates closer together, may be one cause for concern. An inverted yield curve, where short-term rates are actually higher than long-term rates, has been a pretty reliable indicator of past recessions, although some strategists, including JP Morgan’s Dr. David Kelly, think that the central bankers may have broken that barometer with their intervention in the bond markets.
Still, even without a recession, higher interest rates could weigh on market valuations. And those interest rate fears increased this year with reports of higher wage growth. While higher wage growth sounds like a good thing, historically it has led to higher inflation, and higher inflation could push the Federal Reserve to raise interest rates faster than currently anticipated.
Trade concerns are another recent development. After being largely silent on the issue last year, the Trump administration pushed forward a wide variety of tariffs on solar panels, washing machines, steel and aluminum, and over a thousand Chinese products this year. China has responded with its own tariffs stoking fears of a broader trade war. Right now the situation remains more of a trade skirmish, but a legitimate trade war could offset some of the expected economic benefit of the tax cuts passed in December.
Those tax cuts were expected to boost economic activity in 2018, but even before the tariffs were announced, their effects were expected to wane in the subsequent years. And based on the demographics of the developing world, most analysts expect growth to remain below the longer-term averages. So, even if we can manage to avoid policy mistakes from the U.S. government, it would not be surprising for economic growth to slow in the coming years anyway. In the meantime, it looks like last year’s reprieve from volatility has come to an end.
** The S&P 500 is an unmanaged index of 500 widely held stocks that’s generally considered representative of the U.S. stock market. Its inclusion is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary.
The information above represents the opinion of financial advisors Travis Rus, Michael Kernan, and Chris Winther, and is not necessarily that of RJFS or Raymond James. It is not a complete summary of all available data necessary for making an investment decision, and does not constitute a recommendation. Nor is it a complete description of the securities, markets, or developments referred to herein. Opinions are subject to change without notice. Information has been obtained from sources considered reliable, but we cannot guarantee that it is accurate or complete. Past performance does not guarantee future results. Investing involves risk and you may incur a profit or loss. Portions of this material were created by Raymond James for use by its advisors.
