A March Overview
The markets took a BIG dip in February and have continued to trade in volatile fashion. It’s disconcerting to see the Dow drop 1,000+ points in a day, but it’s happened twice during this correction. In the bigger scheme, we have not seen a normal correction in this market for two years and when you go that long without a correction, the dips tend to be more volatile. So, what caused this corrective phase? There are a couple focal points in the market today.
How aggressively will the Federal Reserve (FED) have to raise rates? – The economic cycle really is an intertwined web. The great news is that the global economies are on the upswing. We have not seen economic activity this strong since 2006-2007. The bad news is that stronger economic activity can lead to inflation. We are already seeing inflation in many parts of the world and, if wage pressures are any indication, we will soon see it pick up in the US. The primary way for the FED to curb inflation is by raising interest rates. Therefore, the million dollar question is how far and how fast will the FED have to raise rates? Only time will tell.
Will the tax cuts spur more growth, or increase the deficit? – There are a couple ways a tax cut can go. If the tax cut does not spur more growth, then it’s simply reduced the amount of revenue it takes in. The gamble with any tax cut is that it will generate more activity and, even though tax rates are lower, the cut will generate more overall revenue to the government because there is a bigger pie to tax. Again, only time will tell.
This economic growth cycle has legs, but that does not necessarily mean we won’t continue to go through this corrective phase for a period longer. That being said, a normal correction in this time frame is healthy and one we expect to last a bit longer.