A generation ago, China had little influence beyond its borders. Today, its importance to the world economy rivals the United States’. China’s role in markets is growing, too: in April, it will join a major global bond index. The future may bring a freely traded Chinese yuan and a challenge to the US dollar.
Reduced global trade may have the unintended consequence of strengthening the US dollar, raising interest rates and pushing down stock prices. Together with tighter Federal Reserve policy, these developments may increase market turbulence.
The volatility bond investors expected when 2017 began never showed up. We suspect it will come out of hiding in 2018. With valuations stretched and monetary policy turning, investors will want to think carefully about which risks they take.
Reading the signs in markets can be tough. When he headed the Federal Reserve, Alan Greenspan missed early signs of a housing bubble. Now he’s warning of a bond bubble that’s about to burst. We disagree.
These are uncertain times in markets, and that creates a dilemma for investors who need high levels of income but can’t stomach a high level of risk. We have a solution. Actually, we have two.