VolatilitySubmitted by Destination Wealth Management on October 19th, 2018
The markets continue to fluctuate based on uncertainty around the Federal Reserve and it’s interest rate policy. This has impacted all asset classes as equities remain under pressure and bond prices fall on fears of rising rates. In particular, emerging markets continue to struggle as the United States equity market remains a safe haven for global investors.
Volatility and fluctuation should not be a surprise. As I said on CNBC Asia this week, the new normal is a world filled with drama and uncertainty. For that reason fluctuation will now be a normal part of the investment equation. You can see my comments here:
So what are we to make of the volatility and is it likely to continue on a downward path? These are the logical questions that arise from headlines proclaiming that markets are plunging. And it also is a logical question to ask particularly given the importance of your invested assets to your long-term comfort and security.
We believe that markets often are simply looking for a reason to fall after valuations become stretched. Given the strong rally over the course of the last several months, it is not surprising to us to see markets moving lower. Remember the market is still, as of the moment I am writing this, above 25,000 as measured by the Dow. It’s hard to consider that cheap by any measure.
The reality is markets simply do not always rise and there were times when downturns occur; this is one of those times. However, at present I see no evidence that this is the beginning of a cataclysmic fall. Corporate earnings remain strong, interest rates remain at low levels even after recent increases, and debt levels held by corporations are significantly lower than in 2008.
The key measure in our view is inflation levels. At present inflation is muted. If inflation remains at fairly low levels, this will provide some motivation for the Federal Reserve not to increase rates as fast as many people fear. If interest rates do not increase based on worst case expectations, markets could very well stabilize and once again focus on the fundamental earnings of companies. If interest rates do not increase rapidly, fixed income assets will not face the type of price pressure we have seen over the course of the last several weeks.
To be sure, negative fluctuation is always a concern and it bothers us greatly. Downward pressure in equity and fixed income markets causes us to relook at our assumptions and conclusions as we invest monies. We continue to do this on ongoing basis. And given the fluctuation over the course of the last several weeks, we once again ask ourselves if our perspective is accurate and if our conclusions are based on reasonable thinking.
We believe that the current volatile environment is not a precursor to a cataclysmic market and economic explosion. We believe the current fluctuation to simply be a pause in the ramp up in equity prices to allow earnings and valuations to accelerate. While we do believe bond prices will remain under pressure, we continue to hold the view that long-term fixed income is most vulnerable and it is reasonable to invest in shorter-term fixed income assets.
As I always say, we are paid to be paranoid and you can be assured we are. This is particularly the case in times of uncertainty or market fluctuation. We will keep watching and assessing. If any changes are needed, we will make adjustments.
If you have any questions about this information, do not hesitate to contact me. I’m happy to answer any questions you might have. Also, remember your dedicated DWM financial advisor is always available to you as well.