Market Currents
- Volatility Returns. After a prolonged period of relative market tranquility, with equities grinding steadily higher without much of an interruption, volatility has returned to the market in 2018. There were sharp movements, both to the upside and down, through the year’s first quarter, although equity markets finished the period essentially flat. Bonds declined slightly, due to higher rates in effect.
- Trade War, Or Prelude to Trade Negotiations? Much of the recent market volatility was driven by tariff announcements, and fears of a budding trade war between the U.S. and China. In March, the administration announced plans to impose tariffs on up to $60 billion of Chinese imports. The Chinese responded with retaliatory tariff announcements on U.S. exports. Investors have generally discounted the saber-rattling over trade issues so far, but the matter is a delicate one and its course is not predictable.
- Markets De-Fanged. Two prominent technology stocks, Facebook and Amazon, saw late-quarter weakness. Internet privacy issues surfaced for Facebook, as the company was revealed to have sold user data to an analytics firm that used the data to target voters in the 2016 presidential election. Separately, President Trump renewed his post-election attack on Amazon’s business practices with a multi-day series of tweets that continue even now.
- The Fed Hikes Rates. The Fed, under Chairman Jerome Powell, raised interest rates by another 0.25% in March. The widely-expected move was the sixth increase to short-term rates (now at 1.75%) since normalization efforts began at year-end 2015. Along with the increase came another upgrade in the Fed’s economic forecast, and a hint that the path of rate hikes could be more aggressive.
- Exodus at the White House. More high-profile departures hit the White House. Gary Cohn, the top White House economic adviser, resigned from the administration, following disagreements with the President’s tariff decision. Extending the administration’s shake-up was the contentious firing of the Secretary of State, former Exxon-Mobil CEO Rex Tillerson. Most recently, the Veterans Affairs Secretary, David Shulkin, was fired. Other internal staff have recently left the White House under pressure. Amidst the carnage, the President has tweeted that he’s “almost there” with his preferred lineup of Cabinet and other advisers.
- A Bull Market Correction. The current volatility will likely remain present. A more aggressive Fed, ever-present White House turmoil, and the tariff announcements have all played a role in eroding investor confidence. Negative headlines surrounding Facebook and Amazon are providing fuel to drag down the entire tech complex. However, strong earnings momentum (to be revealed beginning in a few weeks), corporate tax cuts, deregulation, and fiscal stimulus underpin our positive outlook. We maintain our view that this pullback is a healthy correction within a bull market. Risks to our outlook would arise from further negative trade developments or an unexpected pullback from the consumer.
