Monday’s Market Volatility
We don’t usually post commentary on daily market moves. But after a wild day like yesterday, ultimately ending up as the largest one day drop in history for the Dow, we think it is important to reiterate what we have been saying.
First, while the news media will make a big deal of the nominal size of the market decline, in percentage terms it is not even in the top 20 downward moves. The market is spooked by the potential of inflation and rising rates, which are usually the twin culprits blamed for killing bull markets. But as we have said in previous notes, rate rises tied to accelerating growth will ultimately be positive for equities. Now that the tax cut is a fact and the economy is accelerating, we think the new Fed forecast will show a preference for four rate hikes instead of the three that the market consensus had been pricing in. We think that much of the rationale behind the selling over the past few days is the market pricing this new realization in.
The yield on the 10-year Treasury has gone from 1.86% on Election Day 2016 to 2.84% on Friday. Monetary policy is gaining traction, and the “stagnation” of the past several years is looking less stagnant by the day. This is a good thing for the US economy and ultimately for the market.
We will have more days like yesterday in the equity market – volatility is the yin to growth’s yang. However, more economic growth will ultimately be a tailwind for equities, not a headwind. Stock market investors have been lulled into complacency by the persistently low volatility of 2017, and especially after an almost 30% rise over the past eighteen months, shouldn’t be surprised or scared by an increase in volatility. Our view is that those who can remain calm and stay invested will be rewarded over the long-term.
If you would like to discuss this topic further or have any other questions/concerns please do not hesitate to contact us.
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Disclaimer: The views, thoughts, and opinions expressed are for informational purposes only and do not constitute financial advice.
