We are in a period where demand for money has never been higher. Individual savings in the U.S. has nearly doubled since 2008 to $8.4 trillion. These new deposits are not finding their way back to new businesses due to tighter regulations and a similar risk-averse approach from banks. This sentiment is pushing interest rates down to their historic lows as people are willing to pay top dollar for the security of holding goverment-backed securities.
Despite the risk-averse sentiment, global equities were generally up in May driven by positive economic data out of the world's largest economies. This divergence in the risk-averse vs. positive data environment paves the way for more volatility, and in June we have a particularly high number of catalysts, the key ones noted below, that will stir the pot.
Since the European Central Bank (ECB) expanded its asset purchases program in March, the broader picture in Europe has become brighter. There is stronger household consumption, private credit is expanding, and borrowing costs have come down. But the looming threat of the Brexit vote on June 23 should keep investors on their toes, despite that the likelihood of the British population voting to exit the Eurozone is low.
With the parties and the electorate in the upcoming November elections in the U.S. as polarized as they are, investors are left with uncertainty in trying to digest the effect policy changes will have on the economy. A more immediate driver of volatility though, is the highly anticipated Fed meeting on June 14. At the meeting, the Fed will potentially increase the overnight rate in an effort to calm inflation in the expanding U.S. economy. However, this tightening policy diverges from that of the rest of the world. From 20,000 feet, it's a positive move, but the deviation from other global policies will likely fuel the volatility fire.
Expectations of future rate hikes also tend to drive the U.S. dollar up, which causes further volatility in commodities which are priced in U.S. dollars. The potential for that effect on oil in particular adds to the already sensitive price of oil today given the demand-supply uncertainties.
All in all, there are a lot of catalysts which could cause short term swings in interest rates, currencies, and markets. But we feel the long term picture is a positive one and we expect growth, albiet slowly. The fact that we can see a positive month like May despite all of the risk-averse mentality speaks to that point.
So the message for long-term investors is stick the course - you do not want to be on the side lines when the risk-averse mentality changes. More importantly, markets often climb walls of worries. But expect a volatile ride. Take advantage of the volatility using pre-authorized contributions and/or making use of low volatility strategies.
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