This weekly report presents insights from our Global Investment Management team.
As we have expressed in previous reports, we believe that the volatility of late has been a long overdue reaction to risks that have been present, but are just now being fully priced into financial markets.
Volatility itself is simply an expression of fear or uncertainty of the future – or even of the sentiment of today. Just as children fear the boogeyman and things lurking in the dark, their imaginations can add to and fuel that fear. For investors, the imagination may very well conjure a Fed that tightens too far, a serious U.S. government shutdown, the trade war that will never be resolved, the Brexit that may mean the end to the Eurozone, and the death of global growth. The very real truth is that the only major asset class that had been positive for the year, the S&P 500, has been dragged into negative territory.
Today, fundamentals are still positive, but investors are constantly looking to the horizon. Not surprisingly, we have also been worried about the future. However, our team believes equities are being oversold during the short term; rather than something more nefarious, given the uptick in lower risk assets, negative trends in some leading indicators, and tighter financial conditions. Even with that point of view, fear can drive fear, and the dominos could conceivably continue to fall.
The question remains: Will the markets come to their senses on existing fundamentals, or will fear fuel declines? In a normal environment, this type of volatility toward the end of a cycle can be typical. But realistically, we haven’t seen that much volatility due to the Fed backing the market with unprecedented liquidity and the ever-enduring slow economic grind upward. Employment continues to be at some of the lowest levels in history, yet the yield curve continues to be dangerously close to inverting. Price-earnings ratios have hit the lowest in almost 3 years, despite some of the strongest earnings growth ever in the last few quarters, according to Bloomberg data. Meanwhile, the CBOE Volatility Index, or VIX, has begun to fluctuate to higher levels and breached over 25 just yesterday.
We understand the trepidation. Geopolitical issues like the U.S.-China trade war, Brexit, populism, and the Fed’s rate path all seem like they could be bumps in the night. The decision today and the statement by Fed Chairman Jerome Powell will more than likely be analyzed for years to come. To raise or not to raise? Powell is between a rock and a hard place today, and needs to walk a very fine line. However, the Fed’s own opinions on the economy and growth seem to have overshadowed the volatility in financial markets and certain global considerations as the Fed hiked rates once again today – and the market reacted yet again. Powell can’t give the impression that pressure from the White House influences the board’s decision, but he must also give investors confidence that the Fed can “feel” the market. It seems that the U.S. stock market has found a little footing here. We will be cautiously looking at the yield curve and assessing the Fed’s remarks as we end the year.
Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. The information in this newsletter is for informational purposes only and is not intended to be investment advice or a recommendation. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.
Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.
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