Market Beat: Looking ahead to second quarter
April 11, 2018
The stock market routinely goes through cycles of volatility. Over the long term, approximately 85 percent of the time, the market is rising with relatively low volatility.
The other 15 percent of the time the market drops with high volatility.
Market volatility is measured by a gauge known as the "fear index' or the VIX, the volatility index. The VIX is a measure of standard deviation and is derived from the implied volatility of nearby options on the S&P 500 index. Options get expensive when investors are nervous largely because they purchase put options for portfolio protection. Institutional investors may purchase them in large quantities.
One of the main reasons for the current wave of volatility that we've witnessed is the fear of a trade war developing. This is something that we'll have to continue to monitor as time goes on. The administration's policies away from globalization and towards protectionism could affect consumer prices in an inflationary manner. Countries like China could stop buying our US Treasury bonds which could push interest rates up further.
We'll have to keep our eye on the yield curve. The yield curve plots interest rates over the various maturities. It's likely that we'll see a flattening of the yield curve which means that short term rise will rise, but long-term rates may not rise much.
The Fed has said that more interest rate increase are likely this year. The Fed has two basic mandates, full employment and price stability. They have a target rate for inflation of 2 percent. Inflation as measured by the CPI, or consumer price index has been near their target and rising recently. While we are seeing an upturn in inflation, it is probably cyclical, and the longer term deflationary picture will resume at some point due to several factors including demographics.
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Debt levels are high right now and rising rates could be an issue for the consumer, we have been seeing some wage growth recently and that has been something that has been lagging in this economic recovery.
Corporate earnings have been strong and the outlook for the second quarter is good. First quarter reporting season will begin this month and we'll monitor the results to see if they meet the high expectations.
There will be a lot to watch out for this year, including rising interest rates, inflation and the effects of the tariff threat.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.