Market participants appear to believe inflation is back and will be sticking around. That’s affecting how investors perceive the outlook and direction for the bond and stock market. As such, this may be the first time since 1990 that diversification benefits achieved by mixing bonds and stocks together are changing. Since late January, both stocks and bonds are caught in the crosscurrents of increased negative activity in Washington DC, namely tariffs and possible trade wars. Add tax reform and fiscal spending which are boosting the prospects of rising federal deficits. The markets are also aware 2018 is a mid-term election year, wherein the composition of Congress could change. On the opposite side, still low but slowly normalizing interest rates, plus low inflation, plus a lot of money (liquidity) in the financial system, plus high confidence by consumers and businesses, all combine to provide a support backdrop for the economy and financial markets.
Category Archives: Monthly Commentary
Agitation Overdone – Commentary for March
Early in February the S&P500 and other indexes fell into correction territory. Recall, a correction in the financial markets is a 10% or greater decline from recent highs, which occurred on January 26th. Pullbacks, even in strong uptrends, are historically considered normal. But this was the first drawdown of -5% or more in 404 trading days running since February 11, 2016. Is the correction overdone? Perhaps, but it was probably overdue. Market agitation was brought on by 3 occurrences – feelings that valuation was stretched; a big jump in volatility; and uncertainty about inflation (more below). Also, many investors remain concerned that valuations are stretched, and they became shocked by increased volatility following 23 months of calm and steadily rising stock prices.