Last week saw several days of increased volatility and negative returns. We believe there are several culprits responsible for the turmoil and a few things to keep in mind as we look ahead to the rest of the year.
As the economy strengthens and companies find themselves on stable ground, they begin to raise prices. Not only that but we’re starting to finally see wage growth as companies looking to hire are having to offer more to potential employees in a job market that has reached full employment. In anticipation of this inflation, the markets are expecting the Federal Reserve to raise rates sooner than initially expected. This can cause markets to get skittish.
Central Bank Changes
The beginning of February also saw a changing of the guard for the Federal Reserve with former chair, Janet Yellen, stepping down and being replaced by Jerome Powell. While Mr. Powell is expected to favor looser regulations, he is also expected to maintain the same position as Ms. Yellen with regards to anticipated rate hikes. This should have little impact on the markets. At the same time, Central Banks are moving away from historic levels of easing in response to the financial crises and the Federal Reserve itself is beginning to unwind its’ balance sheet. Both policies favor maintaining inflation at healthy levels which could slow market growth.
While market volatility is rarely fun for the long-term investor, it’s worth noting that for the past ten years we have experienced incredible growth and with each passing day we get closer to the end of this bull market. In anticipation of the end of the bull market, emotional investors find themselves wanting to jump ship at the first sign of a pullback. This causes increased volatility as fear-driven investors try to time an untimeable market. The best thing we can do in the face of this volatility is to remember our process and focus on fundamentals.
How We Are Responding
Here at Cedarstone, we have already made some changes in the face of a market that is increasingly late in the business cycle. As part of our routine processes, we spent the end of 2017 and the beginning of 2018 rebalancing our portfolios. In addition, our core bond managers have also begun to de-risk and take a more defensive stance. We maintain that there may still be room to run in the equity markets but we also continue to believe that making big bets on certain sectors is a surefire way to experience a lot of pain. That’s why we remain diversified across many regions, sectors, and asset classes. If you'd like to learn more about our thoughts on the market, we invite you to join us for our annual Investor Conference taking place this upcoming Saturday.
Click here for more information and to register.