In a Nut Shell: Last quarter, we noted that it was unlikely we’d have another calendar year like 2017 in which equity markets experienced both historically low volatility and strong, abnormally consistent returns. It hasn’t taken long for that theory to prove correct. As we discussed in the Market Recap, this past quarter alone saw significantly more volatility than did all of 2017. While there are always any number of explanations, the two that have driven most of the discussions have been inflation fears and geopolitical concerns. Both are well represented at the top of our list for areas to watch over the coming quarters. The global economy remains on solid footing, but unlike the past year other concerns now appear to be driving short term market moves.
For insights on each of these 7 focus areas, read below.
While unanticipated events impact markets, there are some “known” events that are expected to have an impact or are currently having an impact; it is those that we address below. In our comments we also attempt to gauge what the market may be anticipating given that markets typically place their bets ahead of actual announcements or resolutions based on what it believes the likely outcome is. Therefore, market reaction to a resolution is often more a result of how different the result was from the prediction.
- U.S. Tariff Impacts – Steel and aluminum tariff announcements by the U.S. at the end of February were met with concerns and threats of retaliation from across the globe. On the surface the tariffs are rather narrow in scope, but that belies the greater threat. The immediate threat is an escalation of the retaliation rhetoric, but the long term risk is of an actual trade war that disrupts the current global economic strength. While much of the political posturing and rhetoric may just be part of the negotiating process, it certainly can’t be dismissed and is likely to weigh on market sentiment until tensions ease or deals are finalized.
- Inflation – Low inflation levels have allowed global central banks to maintain their easy monetary policies for nearly a decade, long after the financial crisis had abated. While the U.S. has now embarked on a path toward interest rate “normalization”, most of our global counterparts remain accommodative. Inflation figures are broadly still low, but the trend over the past few quarters has indicated an upward trajectory. Should inflation continue to climb, we could see an acceleration of rate hikes at home and the end of accommodative policies elsewhere. Considering that low global rates likely played a significant role in driving asset prices higher, their removal or reversal should be expected to have the opposite effect. The early February equity market fears were in part based on increasing inflation fears, so future readings and indicators will be scrutinized closely.
- White House/GOP Drama – any expectations that the staffing turnover of the current administration would slow after year one have been proven incorrect very quickly. The new year has seen an uptick in turnover and from several key positions. While media proclamations of an administration “teetering” are likely exaggerated, the effect on the administration and its ability to function smoothly is undoubtedly impacted. The other potential impact relates to mid-term elections and what that may mean for the balance of power in the Senate and House. Regardless of political affiliation or preference the constant turnover and changing dynamics increases uncertainty and shifts investors focus away from economic and company fundamentals which is rarely good for asset prices. Those looking for a positive in this could argue that we are growing immune to the chaos and that expectations for stability in that regard are now pretty low.
- Global Economy – Lost in all the geopolitical drama has been a global economy that continues to be on solid footing. In fact, the inflation fears cited earlier are the result of concerns that the economy may be too strong. While some of the geopolitical news may drive near term market swings, most investors still understand the greater importance of the global economy and its impact on long term returns. Other factors may occasionally draw more of our attention, but this one should always be top of mind and toward the top of this list. Despite fears of a global trade war expectations for the global economy remain relatively optimistic. Most expect cooler heads to prevail in regard to tariffs and that U.S. tax reforms will still drive an uptick in growth domestically.
- Russia Investigation – The Mueller investigation continues to move forward and occasionally produces worrisome headlines for investors. It’s unclear exactly where the investigation is headed, but it continues to have the potential to meaningfully disrupt markets. Whether that potential is ever realized is anyone’s guess. The longer it drags on the more investors have become conditioned to look past the headlines and posturing, but the fact remains that the stakes are high and key members of the administration remain in the crosshairs. It is clearly a market moving event, but with no certainty of direction. An exoneration of the administration clears the air and removes the overhang. Anything less is likely to involve a long, drawn-out process creating additional uncertainty that markets dislike.
- North Korea – what list of things to focus on would be complete without a mention of North Korea? Actually we left it off the list last quarter given that little had changed from prior quarters. With the recent announcement that North Korea was willing to sit down with the Trump Administration, there is renewed sense of both hope and suspicion. It remains to be seen when or if these discussions will take place, as well as how market moving they might be, but it is sure to garner plenty of media and investor attention leading up to any potential meeting.
- Regime Change at the Fed – we moved this item down the list significantly from last quarter as the handoff to new Chair Jerome Powell is now complete. He’s even executed on his first interest rate hike since taking the reins. The changing of the Chair, however, is only one (albeit very important) element of the changes happening at the Fed. The Board of Governors is a 7-member body and by the end of 2018 five of those voting members will be new faces (only Chairman Powell and one other Governor will remain from 2017 voters). Only two other times in its history has there been so few “continuity voters” across two consecutive years: 1987 and 2007. With the first the Fed had to deal with a major stock market crash and the second the beginnings of the Financial Crisis. There is no reason to think there was any cause and effect, but it certainly is worth noting!
If it feels like the above list is full of more potential negatives than positives that is likely an outgrowth of the lengthy bull market we’ve enjoyed and our nature to be on the lookout for destabilizing news or events. There remain a number of positives that investors can point to that can support markets and potentially even drive them higher. The synchronized global growth story is expected to continue, tax reforms in the U.S. are likely to spur economic growth in the near term, employment levels continue to improve, and innovation in areas such as robotics and AI (artificial intelligence) are creating new investment opportunities every day. There is still much to be excited and positive about as an investor even if we need to temper our return expectations due to valuation levels.
To learn more about events expected to have an impact on markets, please contact Brad Swinsburg 404-874-6244.
Explore more information on the fourth quarter of 2017 by visiting these links:
Market Recap: First Quarter 2018
Market Outlook: First Quarter 2018
A Deeper Dive: The Impact of Rising Interest Rates
Summary: First Quarter 2018
Unless stated otherwise, any estimates or projections (including performance and risk) given in this presentation are intended to be forward-looking statements. Such estimates are subject to actual known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from those projected. The securities described within this presentation do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in such securities was or will be profitable. Past performance does not indicate future results.