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Ups and Downs - Spring 2018

If you look at a chart of the Dow Jones Industrial Average over the last ten years, you see an almost unbroken upward trajectory that started early in 2009 at the depth of the Great Recession, and continued until nearly the end of January of this year.

But, as January wrapped up and February began, the clear sailing of earlier years appeared to come to a rather abrupt end. Something shifted in the equities markets. The Dow Jones (and other indexes) began to see-saw wildly from day to day. As I write this column, the Dow has dropped by more than 2,000 points since its January 26th peak.

According to an article in Barron’s, “What Broke the Market… and What Comes Next” (Feb. 10, 2018), the specific catalyst for this destabilization was the release of the January payrolls report showing an unexpectedly sharp increase in wage growth. Inflation fears that had been lurking in the shadows were suddenly front and center. Ten-year Treasuries had already begun a slow rise, climbing from barely over 2% as recently as September 2017 to 2.66% on January 26. In the wake of the payroll report, they jumped up to 2.84% by Feb. 2 and have been trending upward since that time. In late April, they pushed past the 3% threshold, although they have fallen back to the high 2% range since then.

Things really got interesting on Monday, February 5 when the Dow Jones plunged 1,175 points during the trading day, the largest single-day loss in the history of the index. This dramatic decline in the market was accompanied by a huge spike in the VIX – also known as the “fear index.” The VIX jumped 116%, the largest single-day increase in its history. This was especially unsettling because the VIX had been relatively flat for many months. The sudden spike reflected the equally sudden change in market sentiment, from confidence to abject fear. Although it has settled down since February 5th, the VIX, like the equities markets, remains volatile.

But it’s not just inflation that has the markets worried. Events in Washington are also having an impact on Wall Street. The markets loved the stimulus provided by the tax cuts enacted in 2017. But, like many of us, the markets are concerned about the increasing level of chaos engulfing the White House, the accelerating departures of the more moderate advisors in President Trump’s circle, and the growing threats of a trade war, not just with China, but with our allies. In this Wonderland world, things really do keep getting “curiouser and curiouser.”

For now, all we can say for sure is that market volatility is back and what comes next is harder than ever to predict. The economy is doing well. It received a genuine boost from the tax cuts passed last year. Other major economic zones – China, the Euro Zone, Great Britain and Japan – are all doing well, the first time in many years that all of the world’s major economic areas are expanding simultaneously.

The question is, can it last? Will inflation cause the Federal Reserve to keep raising rates and thereby slow the current economic expansion? Of even greater concern – will a trade war blow up in earnest, increasing prices for US consumers and tensions around the globe? Will the heated rhetoric coming from the White House prompt a more serious military confrontation in the Middle East, North Korea, or God forbid, Russia or China?

We can survive rising interest rates. But surviving these other challenges will be harder. And it is not just the performance of the stock market that lies in the balance.

Steve Cain is Secretary of RPBG. He writes articles and compiles content for our quarterly newsletter. The opinions expressed in this column are his own and do not necessarily reflect the views of RPBG and its Members.



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