Key Points

  • Stock markets have behaved much differently in the last two months as compared to the previous year. Increased volatility, however, doesn’t mean the end of the bull market, but it is becoming a more challenging environment.

  • The U.S. economy shows few signs of slowing down but risks to growth are rising as trade issues emerge and the Federal Reserve continues its tightening campaign.

  • The global wall of worry has a few more bricks in it, but positive news should help markets continue to climb that wall, although trade protectionism remains a threat to global growth.

Like flipping a switch

“A picture is worth a thousand words.”

Changing environment

Past performance is no guarantee of future results.

Those two pictures show what’s happened better than words ever could—a swift change of market character since late-January. The market that let negative news just roll off its back is now more sensitive to ongoing political turmoil, White House personnel shakeups, tariff announcements, data breaches, etc. But as we’ve noted, last year was the exception; this year is closer to the norm. Sticking with a long-term plan is typically harder to do when the market isn’t going straight up. But, ironically, this is probably a healthier investing environment which could help keep the bull market alive. Valuations, which were quite extended as we entered 2018 have had the chance to retreat somewhat—courtesy of both the correction in prices, but also the strength in earnings. Additionally, sentiment conditions as measured by the NDR Crowd Sentiment Poll had gotten to record optimistic levels, but have now corrected back to the neutral level. Both of these developments are worth cheering, but unlikely to keep continued volatility at bay (with some bunny-like tendencies likely—discussed below).

Risks are rising

With the announcement of steel and aluminum tariffs and the more recent tariffs of up to $60 billion on Chinese imports, trade war concerns are elevated. At this point we believe the evidence suggests that the situation won’t deteriorate from a trade spat to a trade war, as both Canada and Mexico are exempted from the steel and aluminum tariffs; while FactSet is reporting that the United States is continuing to negotiate exemptions for the European Union and Australia—not exactly the mark of a trade war. But the risk is there that has clearly unnerved some investors (see Liz Ann’s Trade Mistakes: Will a Trade Spat Turn Into a Trade War article for more). Additionally, problems with personal data by Facebook brought forward the prospect of more government regulation on the tech sector in general and the social media space more specifically. While there is probably a place for some form of regulation, the tendency of government has often been to overreach and impact growth negatively, so it’s something to definitely watch in the coming weeks and months. The tech sector’s fundamentals still look quite good to us and we look at this pullback/correction as an opportunity to add to positions as needed. Finally, add on the Federal Reserve meeting that had a slightly more hawkish tone (see Kathy Jones’ article Fed’s March Meeting: Another Hike, More Hawkish Tone) and there are plenty of risks suddenly emerging to shake the confidence of investors. But another way to look at these increased risks is a rising Wall of Worry—which is often what stocks like to climb in a bull market.