A February Overview
Anyone else getting a bit seasick watching the market making these huge swings over the last month? In reality, we have not experienced a “normal” correction in over two years, so this correction was not unexpected. The bigger problem is that extended periods of time with low-to-no volatility in the markets tend to reverse to much higher volatility and that’s what we are experiencing today. The ironic part of this drawdown is that it’s being driven by a global economy that is much stronger than most expected.
Along these lines, there are a couple of themes we think bear watching as we move forward in 2018:
How quickly does inflation return? – The US economy was one of the few global economies that grew consistently from 2010 to 2016. When there’s low global demand for goods and services because of a stagnant economy, inflation remains low. Couple the slow growth with the money the FED pumped into the banks, and inflation was kept artificially low for an extended period of time. However, last year marked a significant turn. The global economies have now lifted, in unison, and that has created a very real threat of renewed inflation.
Will the rates continue to rise? – The answer is “yes”. As inflation picks up, the FED could have to raise rates faster than they would like and that’s what has the equity markets spooked. The FED would ideally like to raise rates slowly. But, if inflation accelerates, they will have to be much more aggressive, hence the knee-jerk in the market.
It’s a real “good news/bad news” scenario right now. If the economy grows strongly, rates will go up. Eventually, this could hurt global growth. For now, we believe this corrective phase will eventually give way to higher prices later in the year. But, we also expect the markets to be more volatile than they have been over the last couple of years.
As mentioned in previous communication, we have generally raised our cash positions. We are monitoring potential trending opportunity to reinvest those monies.