Last month we talked about market volatility, what to do and what not to do. Well, it looks like market volatility is here to stay. While the US economy is doing well by most objective measures, uncertainty in several key areas has returned and the markets hate uncertainty. What are some of the causes of this uncertainty?
- There is the fear that the economy is doing a bit too well and that the Federal Reserve will raise interest rates too quickly and put the economy into a nose dive. There is a new sheriff in town at the Federal Reserve and no one is sure how aggressively Jerome Powell will be in keeping inflation at bay. The meeting on Wednesday seems to indicate that it may be four times this year which would put the benchmark interest rate at 2.5% by year-end. Historically the market has done OK in a rising interest rate environment, to a point, but some think 2.5% may be a tipping point. Of course, Powell can always change his mind along the way.
- The unemployment rate is low, very low, and there is evidence that it is getting increasingly harder to fill some key roles. The concern here is employers will have to raise wages to entice workers to fill those roles and that workers may jump ship to employers for higher pay. Higher wages will inevitably result in higher costs to employers which they will pass on to consumers in higher prices. This could lead to inflation even though there is little indication that inflation is heating up, yet. If inflation does start to creep up this would give the Fed another reason to raise interest rates.
- There has been turnover and even a bit of turmoil in the White House and the scope of the ongoing Russia investigation seems to keep widening. That statement may be an understatement and it may be part of a broad strategy, but we don’t have time or space here to discuss all the variables of all the White House stories. The sheer number of news stories here is enough to give the market pause.
- There is concern that the recently announced tariffs will bring about a trade war which will produce no winners. The saber rattling and trade war threats are likely to continue and this has a direct impact on exporters. Boeing, Caterpillar, and U.S. Steel were just some of those affected in the 1300+ move to the downside the week of March 23rd on the DOW Jones Industrial Average. (Davis, 2018)
- Stock valuations have been on the high end for quite some time, especially in technology. Think of valuation as being the price you pay to own a stock or bond. We typically price or value investments in terms of what we believe we can earn on that investment in the future whether it is a stock, bond or piece of real estate. When prices are high we pay more for each dollar of earnings. As long as prices keep going up and income is not your primary focus there is no problem, but when valuations return to a more normal range, those investments that are valued at a lower multiple of future earnings will likely hold their value better than those that are valued at high multiples.
These are just a few of the headline issues that have the markets moving up and down and this is not a detailed analysis of any of the causes or concerns. We discussed last month that it is important, in these volatile and challenging times, to really take stock of your investments and the risks associated with those investments. Take the time to reevaluate your thoughts on risk and realign your portfolio accordingly. If you anticipate needing cash in the near future, make sure it will be available when you need it. In other words, don’t wait until the last minute to sell investments to raise cash and don’t wait until a market crash to evaluate your risk and make changes to your investment strategy. If you find the market ups and downs keeping you up at night give us a call.
Carl Richards, C. (2018). Behavior Gap/about. Retrieved from Behavior Gap: https://behaviorgap.com/pages/about
Davis, B. (2018, March 23). Trump Confronts China on Trade. The Wall Street Journal, p. 1.
The information provided is for guidance and informational purposes only. The articles are not the opinions of ProCore Advisors, LLC.