Despite the market noise, a healthy backdrop exists for the U.S. equity markets and economy.
April 2, 2018
The market volatility we saw in early February persisted through March – and has now continued into the start of April. Since the S&P 500 peaked on January 26, the index moved at least 1% on a daily basis on half of the 43 trading days through the end of March.
“This contrasts to only one move of greater than 1% during 2018 prior to that peak and is a far cry from the calm seen in 2017, when the S&P 500 produced a 32-year volatility low with only eight days with moves of at least 1% for the full year,” shared Managing Director of Equity Portfolio & Technical Strategy Michael Gibbs.
However, a healthy backdrop for the U.S. equity markets exists amid all the recent market noise – and U.S. economic conditions remain quite healthy. In a recent Federal Open Market Committee (FOMC) press release, the Fed highlighted strengthening of their economic outlook. Growth in the remainder of the year is expected to be relatively strong, with an unclear impact from fiscal stimulus such as corporate tax cuts and increased spending.
Having raised short-term interest rates again on March 21, Fed officials are split in their expectations of whether there will be two or three more hikes this year. “Since December of 2015, including this month’s hike, the FOMC has raised rates six times for a total increase of 1.75%. Over the same time frame, the 10-year Treasury has risen only 0.55%, and we saw the Treasury yield curve flatten during the month,” explained Doug Drabik, senior vice president, Fixed Income Services Group.
The Fed expects inflation to drift gradually higher, while the unemployment rate is anticipated to fall to nearly a full percentage point below what it considers a long-term sustainable level in 2019 and 2020. However, the risks of a monetary policy error are increasing.
While well-intentioned, tariffs raise input costs, invite retaliatory tariffs on U.S. exports, disrupt supply chains and increase global investment uncertainty. “The bigger concern has been the reaction of our trading partners, which, to date, has been muted – giving rise to the hope the worst-case fears about a trade war are more likely not going to be realized,” according to Washington Policy Analyst Ed Mills. The financial markets have responded to a one-step back, one-step forward set of trade policy decisions.
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