Market VolatilitySubmitted by Destination Wealth Management on November 20th, 2018
Why are the markets so volatile? We believe there are three basic reasons.
1. Concerns about interest rate increases and the impact on economic growth. Will further tightening by the Federal Reserve overwhelm tax cut benefits and cause the economy to move back towards recession?
Our position: we expect the Federal Reserve to moderate their hawkish perspective next year. They may raise rates in December although the odds are moving lower given the price of oil and obvious concerns by market participants.
2. Trade tariffs create economic headwinds combined with stronger dollar for exporters. Will trade tariffs continue and, if so, what will the net effect be on economic growth? Is there any reasonable chance the tariffs will start to be reduced based on conversations between the Chinese and American trade representative?
Our position: We believe it is in both countries’ best interest to settle the trade issue. We also believe that China is even more motivated than the United States to settle the dispute given the significant impact on the economy in China. Our recent on the ground visit confirmed our perspective that the Chinese see the trade tariff issue similar to the US financial crisis; it’s a very big issue for them. We expect some resolution in the first six months of next year.
3. Momentum doesn’t last forever. At some point valuation begins to matter and that clearly is beginning to happen as high growth, sentiment-based stocks are punished based on perceived excess valuations. Is that moment here? Do valuations once again matter?
Our position: We believe that a rotation to assets with more reasonable valuations is likely given the long out-performance of high growth assets. Companies that have been punished for paying dividends in less exciting industries likely will hold appeal in more volatile economic conditions. Momentum is exciting and rewarding when markets move up but can be dangerous in down markets. Our perspective is valuation matters.
Do not panic. This is not a financial crisis despite assets moving lower. This is valuation adjustments and if you’re invested in the right long-term assets, a portfolio strategy designed for this environment will be fine.
Consider the drop in oil prices to be great news on the inflation front. Be cautious when dipping into assets that have fallen significantly. Remember that just because something has dropped 20% doesn’t mean it can’t drop further.
Also note interest rates. With the market falling, the 10-year Treasury has actually gone up in value meaning yields are reduced. Remember all that concern about interest rates increasing? That’s true but there are other factors in play that affect interest rates such as market fear.
We are not surprised that the market remains volatile. It is our view you will continue to see significant fluctuation and, for that reason, having a diversified strategy not focused on high growth assets is appropriate and prudent.
We will make adjustments as needed but as always, we position portfolios for the long-term. This means investing based on the assumption that markets will rise and fall. Long-term results are our key focus.
If you have any questions about this information, please let us know. Always happy to answer any questions.