Broker Check

Inflation Fears Amidst Market Rebound – for week ending February 16th, 2018

| February 16, 2018
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Global equity markets surged with a vengeance during the week and eased fears that further downside would continue in the immediate short-term.  The gains appeared fairly broad based and were met with impressive flows from institutional and retail investors.  The “buy-the-dip” notion prevailed in a way that resembles historical market corrections and it’s a notion we have extensively discussed over the past few years.  The last time we experienced such volatility, which ultimately resulted in a market swing to the upside, was in the first quarter of 2016 where the Standard & Poor’s (S&P) 500 troughed near -13% from its peak.  Of course, it’s easy to forget such turbulence over a longer market cycle but it does provide notable insight to revisit risk management guidelines and to revisit the actions that took place across our multiple strategy investment platform.  As net equity buyers in times of market stress, or corrections, we attempt to enhance long-term potential returns by purchasing equity exposure on sale, a notion that many retail clients tend to forego.  By being objective, we use data to our advantage and aim to enhance our risk management guidelines by proactively enabling strategies to take advantage of market volatility.  It’s important to note that none of these actions are intended to provide market timing capabilities, nor do they suggest that we believe further downside is not possible.  As impartial participants in equity markets, we do not create capital market expectations.  Rather, we rely on objectively driven strategies to pinpoint times of potential opportunity.  Therefore, when the S&P 500 troughed near -10% this year, we were decisive buyers of equities across all strategies.  We stand ready to take advantage of more opportunities if the chance arises. 

Shifting to the actual gains for the week, the S&P 500 closed higher by an impressive 4.37% while the MSCI Emerging Markets Index gained 5.03%.  The story of emerging market equities remains impressive given that the downside experienced in the sector remained relatively better than that of domestic equity markets.  It’s possible that cheaper valuations played a key role in investors’ appetites but it may also reflect the notion that consumers in emerging markets look strong.  In addition to that, we would argue that the general weakness of the U.S. dollar has been a tremendous benefit to such economies and we believe the benefit may continue throughout 2018.  Faster than expected monetary policy tightening by the Federal Reserve may curtail such a potential outcome.  As it relates to monetary policy, it’s important to pinpoint that investment grade fixed income exposure (i.e. bonds) are underperforming the S&P 500 by nearly 4.60% year-to-date.  Such a drastic spread amidst a cycle that has experienced equity market volatility is indicating [to us] that the perceived protection from bonds may be overplayed given the current environment of threatening inflation pressures and higher interest rates.  We remain firm believers that broad global equity market exposure, over a 10 year cycle, may provide the best returns. 

On the economic front, data releases tied to consumer and small business optimism revealed upbeat sentiment, which may appear counterintuitive given the equity market downside since early February.  Nonetheless, the National Federation of Independent Business revealed sentiment figures that are near record highs (again).  It’s possible that fiscal policy benefits tied to the new tax policy may have provided a boost.  The spillover effect to the economy remains to be seen. 



Investment advice offered through CX Institutional, a registered investment advisor.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.

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