Feb 08, 2018

Equity Markets Remain Volatile

By Bob Landry

Equity markets remain volatile in the wake of Monday’s rout and Tuesday’s impressive late-day rally. The S&P 500 bounced all over the place on Wednesday and remained in positive territory until late in the session when the index fell 1.2% in a span of about 22 minutes to close lower by approximately 0.1%.

Investors continue to struggle with the implications for higher bond yields, which have also exhibited extreme volatility. The yield on the benchmark 10-year U.S. Treasury note closed at 2.84% on Wednesday, rising from around 2.75% earlier in the day, in the wake of news that U.S. Senate leaders have reached agreement on a two-year budget that would avoid another government shutdown but would meaningfully increase federal spending.

It is important to stress that economic fundamentals overall still appear favorable. That should help provide comfort to those concerned about the risk of a full-fledged bear market. Yes, stock valuations have been stretched for some time, but bull markets end when economies slide into recession.

The level of market volatility should not come as a surprise after such a lengthy period of relative stability. The unwinding of crowded strategies tied to the recent low volatility environment has almost certainly exacerbated recent market swings. Investors should view the wringing out of excesses and complacency that have built up over time as a healthy development.

The key risk remains the Federal Reserve (Fed), which tends to view robust economic growth as inflationary. Market stability was broken last week as investors began to question the pace of interest rate target increases the Fed would pursue this year. This market volatility may chasten key Fed inflation hawks to reassess their expectations for rate increases this year. New Fed Chairman Jerome Powell is likely to try to persuade his colleagues to proceed with caution.

Eventually these unusual intraday moves will subside, but clients should probably not expect market volatility to return to levels seen in recent years.

Market volatility is quite unnerving, especially after such a long absence. We begin to view recent experience as the norm. Psychologists call it “recency bias”. But as market history demonstrates, such pullbacks are completely normal. The best advice is to avoid panic and stay the course. We at United Capital stand ready to help clients navigate through the uncertainty.

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