Volatility returned to global stock markets in February, and has overstayed its welcome, after a historically extended period of calm seas. The financial media is awash in stories about the underlying causes of the recent market correction, but we can’t know for certain if the initial selling was based on fundamental factors or simply profit taking on the heels of very strong performance over the fourth quarter of 2017 punctuated by a 5.22% jump in the S&P 500 index in January.
Wall Street’s mood quickly swung from apparent giddiness over the newly-enacted tax reform legislation to somber concern over a stronger-than-expected January employment report, leading to speculation among some pundits that inflation may soon accelerate and force the Federal Reserve to push interest rates up faster and perhaps farther than the markets had expected over the course of 2018. It may not be coincidence that a new Federal Reserve chairperson had been sworn in just days prior to traders’ swift reaction to the economic data. Central banks have a history of over-reacting when the economy gets too strong for their liking, and wary traders may be sending a signal to the Fed to exercise caution lest they overshoot and choke off the economic acceleration prematurely.
Speaking of choking the economy, the so-called “tariff tantrum” ignited by President Trump’s announcement that he intends to invoke large tariffs on imported steel and aluminum sent the markets back into retreat mode in early March after they had staged a strong rally over the second half of February. The last thing the global economy needs just as it is gaining steam is for trade wars to break out. This is a potentially serious threat to both the economy and markets that merits investors’ attention. Stay tuned.
As of the market close on April 6th, year-to-date the S&P 500 index is down -2.10% while the technology-heavy NASDAQ 100 index has given back strong early gains and remains just above water at + 0.46%. Overseas developed markets as measured by the MSCI EAFE index are down -0.92% while the emerging markets MSCI EM index gained 0.73%. US interest rates are sharply higher across the maturity spectrum over the first three months of 2018.
The positive spin on the return of choppy markets is that economic strength, not fear of recession, is the underlying driver. After nearly two full years of calm, markets are finally returning to normal – that is, volatile.