13 Mar 2018

Well, That Escalated Quickly.

March 13, 2018

Over the course of a few short weeks the stock and bond markets went from a period of quiet, uninterrupted bliss to what now feels like complete chaos for investors. Many realized the day would come, and felt mentally prepared, until it really happened. Now it seems the harsh swings may be here to stay for a while, and some of these swings are normal and some are not so normal. Let’s take a look at what’s going on, what might come, and why some old adages are relevant.

What’s Going On?

It all began with a report on February 2nd showing that wages were increasing, which is good, and at a rate that was expected, no real surprise there; however, some read this as negative despite the expectations. Inflation typically causes the Fed to increase short term interest rates, but this was expected too, the Fed has been broadcasting this since last year. What changed?

Hedge funds trade funky things that track how much the market bounces around. They bet big there would be no volatility, and when it came, some think these trades led to even more selling. Now the market seems likely to react to anything. For example, when the new Fed chair, Jerome Powell, gave routine testimony reiterating that the Fed expected three rate hikes this year, the market dropped again. Either they didn’t get the message the first couple of times, or everyone is nervous and will use any excuse to sell. There is some drama here.

Essentially you have the president and congress attempting to crank up the economy at a time when the Fed is doing the opposite by trying to keep it from overheating since they think the economy is in fine shape. It will be interesting to see how that tug of war plays out. And as if that wasn’t enough, the president announces tariffs on steel and aluminum to everyone’s surprise. The market doesn’t like surprises, see above where things happening as expected was freaking people out. Why tariffs are bad is a blog post unto itself, but it’s not good news, and the markets indicated they were none too happy. So, the days of a gently increasing stock market seem behind us for now, and with rates increasing bond investors will feel some pain too.

What Now?

There is still a lot to play out this year, the markets will be looking closely at how much corporations make this year in order to justify stock prices, which are still historically high. You can guess by now what happens if those numbers aren’t perfect. Then we have the midterm elections this year, and the stock market usually doesn’t like Democrats running congress, so as the drama of primaries and polling plays out we can expect to see more ups and downs.

We have short memories, during the Great Recession (think 2008ish) we quickly became numb to these kinds of wild movements, and investors who stayed the course and didn’t panic survived and did quite well in the years that followed. There is power in the law of averages, and over the long term we see that markets generally return to historical averages. The market may have gotten ahead of itself as the economy grew, and now as interest rates return to long term averages, they cause a very natural drag on stocks.

Hold the Course

What do we do? We hold the course. A proper asset allocation will carry you through this. And if you have questions, concerns, are losing sleep, or feel like you’re getting mixed messages from those who manage investments for you, then you get help.

We’re here to help, and always happy to offer perspective. Please don’t hesitate to reach out.

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