Market volatility in Q1: What’s going on?
Equity markets started the year off strong in January, but, its meteoric rise was a bit myth-defying after gaining about 5 percent in 30 days. Over the last few weeks, the market has digested that rapid rise, and in the second week of February, we saw a blip of a correction. Now we’re down just 7.5 percent from the peak — despite this, the market has had solid returns over the last 12 months.
We may see the economy continue to overheat due to the stimulus from the tax law change, which came when the economy didn’t really need a stimulus. There may be continued volatility in the market until there’s more clarity from the Federal Reserve regarding interest rate hikes. If it’s slow and measured, we foresee the market stabilizing, but only time will tell under new Fed chair, Jerome Powell.
It’s possible we see markets in Europe and Japan exceed U.S. performance this year as a weaker dollar is positive for the U.S. investor and presents the opportunity to invest elsewhere. In addition, with inflation and increased interest rates, investors should be careful with bonds and fixed income sector in general. Although the market has already factored some of this in, we saw bond indexes in negative territory back in January, but individuals should be cautious and look to ultra-short positions to keep money that may be needed in short-term funds during volatility.
It’s important to keep in mind that corporate earnings, cash positions and debt structure are still very strong, which tends to indicate we have some room to run in this bull market before we see a true reversal. We believe it’s some ways off until we will get a true correction and bear market again. We’re cautiously optimistic but there will likely be volatility in the foreseeable future.