This post was originally sent to clients in an email on February 5, 2018.
Global equity markets had a significant correction today (originally February 5, 2018). In a nutshell, we feel this is a correction that can be pinned to jitters around the uncertainties of interest rates rather than any significant fundamental data and therefore, do not see it as a larger trend. If you would like to read our full commentary on the market moves today, please continue reading the note below.
The equity markets slide this month has largely erased the gains since the beginning of the year. It's on days like this that the true power of the Fed can really be felt. The Fed's guidance on US interest rates plays a significant role in the market and, coincidently, a new Fed Chairman, Jay Powell, was sworn in today. As a refresher - the Fed moves interest rates to either cool off (increase rates) or heat up (decrease rates) and keep inflation at the 2% target.
S&P 500 Returns - Year to Date
Right now, interest rates are moving up, but long-term rates are not pricing in significant increases from the Fed, even though the economy appears to call for it as the global economy is doing quite well. You only have to look back to Friday's US jobs numbers to see that wages are up 2.9% year-over-year and 200,000 new jobs were added in the past month. As we stated in this month’s economic update, it’s not the global economy that is shaky, it’s how the growth is priced into bonds. Right now, investors are worried that the growth is not being priced in, and now with a new Fed chair and new policies, they are worried that inflation may not be kept under control.
While this is certainly a big move, corrections are not unexpected. We position the portfolios to be well diversified and mitigate as much of the risk as possible. Global markets are down today as well but have weathered the storm better than the US. The US dollar, which we also maintain exposure to, has climbed in recent days, offsetting part of the loss. Bond yields have also tightened in, creating a further counter to the slide in US equities. All in all, when looking at this correction from 10,000 feet, it feels just like that, a correction. There is little in the way of true fundamentals suggesting this is a larger trend – rather it looks more like a knee-jerk reaction to some uncertainties, exaggerated by momentum trading. Our advice is to stay the course. We will continue to monitor the current market situation carefully and update you if we decide to make any changes to your portfolios.