March-Here’s To Your Wealth
Were the wild stock market gyrations of the first quarter a lot of hullabaloo about nothing? In January and early February we witnessed a dramatic drop in stock prices followed by a rapid recovery with significant market breadth (a wide amount of stocks participating). At one point in mid-February, the S&P 500 was down over 11% and now it’s basically flat for the year. So anyone who started out the year losing sleep or reallocating out of stocks may have been better off turning off the cable TV news.
The V-shaped recovery is not unusual in presidential election years. There is great uncertainty about the political outcome at the start of an election year. But the premium attached to stock prices begins to dissipate when that uncertainty is reduced and the political field narrows. While all the fluctuations cannot be attributable to politics, we have seen that pattern play out in this historic, entertaining presidential election year.
Adding to this volatility is the divergence in interest rates around the world. While the U.S. has embarked on a modest rate increase strategy, our major trading partners have embarked on a negative interest rate policy. We are now the global leader in the positive interest rate policy camp while the European Central Bank and Japan are the main players in the negative interest rate policy camp. Policy divergences, which were prominent throughout the quarter, amplify the volatility of stock prices in both directions.
The other driver behind the stock market volatility has been oil prices. We have covered this at length so we will simply note that the stock market rebound also correlated with a rise in oil prices. There is still skepticism however, that the rebound in oil is permanent. One indication of this doubt are the lagging bank stocks which reflect continued fears that oil patch debt could result in higher than expected loan charge-offs. These losses would certainly not be of the magnitude from the housing crash of 2008, but enough to make investors wary.
Meanwhile, the US economy continues to grow at a slow pace which contributes to our low inflation environment. This means the Federal Reserve (Fed) doesn’t need to move on raising interest rates any time soon. We have stated our doubt about the Fed’s commitment to raise rates for a variety of economic – and dare I say political reasons – and we are sticking to that thesis. So for investors staying in cash hoping rates will rise and offer a more favorable entry point into bonds; you may want to make sure you have a comfortable chair to sit in while you wait.
Quote of the Day:
Adversity is the first path to truth.
Mark Avallone, MBA, CFP®, CRPS®. www.PotomacWealth.com
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This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or stocks in particular, nor should it be construed as a recommendation to purchase or sell a security. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. Diversification and asset allocation do not guarantee against loss. They are methods used to manage risk.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
*The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
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