What's Going On With the Markets?Submitted by Cameron Woods Portfolio Management on April 12th, 2018
April 12th, 2018
By: Jeff Woods
There has been an unusual amount of day-to-day volatility in the stock markets over the past few months.
Before we can address the why, we need to address the what.
What makes the market go up?
For the most part, the market will continue to rise if the majority of market participants believe in one of two positive narratives:
- Economic growth is slow but the price of money/credit remains ultra-cheap and plentiful (low interest rates and accommodative central bank policy).
- Economic growth is strong but will overcome the headwind of increasingly expensive money/credit (rising interest rates and tightening central bank policies).
Since 2009 we have been existing in the first narrative. More recently, the second narrative is starting to gain widespread acceptance. At a Fidelity fund manager conference back in December the consensus opinion was that the only risk to the continuing global growth story was a pick-up in inflation.
And pick up it did – with a vengeance.
The catalyst to the start of the recent market volatility was a much larger than inflation reading in late January. The reason it matters so much, is that if the inflation problem continues to get worse then it puts both of the positive narrative above into doubt.
So, is the market doomed?
No. Or perhaps more succinctly, ‘not yet’. The odds, as we measure them, are still positive with regards to this volatility resolving itself to the upside, eventually.
We would stress we are not making a prediction that everything will be ok. We are making an assessment of the odds of a positive future outcome based on measurable market conditions today. We will check again tomorrow, and the day after that, and so on, and if the odds change we will see it and take action.
So yes, there are storm clouds on the horizon, but the sun is still shining. If the roiling black mass of storm clouds rolls in, we will get out of the way – but no sooner.