A Recap of Recent Market Volatility
Equity markets entered into a correction in the beginning of February for the first time since 2016, as wage growth came in better than expected and was the strongest the economy has seen since 2009. This surprise raised fear over rising inflation, which in turn, resulted in concern over the Federal Reserve raising rates faster than expected. Although markets recovered off the lows, volatility picked up again towards the end of the month and resulting in the first negative calendar month for the S&P 500 since 2016.
We recently discussed at our State of the Economy presentation that we are more concerned about rhetoric out of Washington with regards to negative trade policies versus rising interest rates. These concerns came to light this week as President Trump announced an increase in tariffs on both steel and aluminum imports, which caused the market to sell off by more than 1% yesterday and continued downward pressure today. The tariff raises the prospect of other countries retaliating by placing tariffs on American exports, which creates the potential for a trade war. This has the potential to raise prices for American consumers, as companies will have to pay more for good and services produced outside the U.S. We will be closely monitoring this situation for its impact on the economy and inflation. Although we believe it is not an issue at this moment, further escalation of tariffs and rising potential for a trade war have the potential to derail equity markets and cause a more significant and prolonged selloff.
Despite the increased volatility, which we believe is a return to a normal functioning stock market after last year’s abnormally low volatility, we view rising wages and a strengthening economy as a positive development, since consumption accounts for 70% of the U.S. economy and higher wages allows companies to earn more on goods and services. However, although not an issue now, we are becoming increasingly concerned about the potential for a trade war, especially considering the President’s comments over the past two days. We will continue to monitor this as well as the pace of wage growth in our assessment of the economy and potential for tighter monetary policy from the Federal Reserve in 2018.