Key Points
  • U.S. stocks have been trending higher, but endured some rough water over the past few weeks. Although bumpy, major U.S. indexes have moved to the top of the recent range and the secular bull market should stay intact.

  • The U.S. economy is in good shape and likely able to withstand some of the brewing storms. Bouts of volatility are unlikely to diminish Fed tightening expectations and a June hike remains a near certainty.

  • Trade concerns are ramping up; and although the major global players look able to withstand at least some trade stress, the margin for error is narrowing.

“He that will not sail ‘till all dangers are over must never put to sea.”
- Dr. Thomas Fuller

Choppy waters

Investors in U.S. stocks may have felt like being on a boat where passengers are running to one side, then deciding all of a sudden to rush to the other side. It can be stomach churning, but risks are part of investing and bouts of volatility should persist. Joining the shifting crowd is not a successful way to invest; rather those that remain calm during the storms and keep their focus on the horizon have a much better chance of achieving their goals..

Déjà vu: a European country having political problems and fear rising that its membership in the Eurozone may be in doubt. This time it was Italy, with some sharp down moves on the initial political/election uncertainty—amid a spike in Italian yields. But a calming in those tensions helped U.S. stocks move to the top of their recent range. Continued turbulence is to be expected as the structural constraints in Europe remain but we don’t see long-lasting damage at this point. As a reminder, in another potential European “crisis”, the reaction to the Brexit vote in June 2016 was violent at the time, but looking back it was a minor squall in an ongoing bull market.

Brexit vote reaction looks minor in hindsight

S&P 500 Composite with Brexit date

More broadly, what we are likely experiencing are fissures associated with a receding tide of global liquidity, tighter financial conditions, a strengthening U.S. dollar, and of course trade tensions. On trade, the United States let the originally-announced steel and aluminum tariff exemptions expire, and there were retaliatory actions from several of our trading partners. This is another step closer to a more damaging trade war, with rhetoric having ramped up lately. On the dollar and tighter financial conditions/less global liquidity: an apt analogy is fishing with dynamite. We’ve begun to see emerge some “small fish” in the emerging market world have problems with the strengthening dollar (such as Turkey). The money that many emerging countries have borrowed in U.S. dollars becomes more expensive to service. For now the problems appear contained, but we are watching indicators for signs that bigger fish may float to the surface. As we have been cautioning, when the liquidity tide begins to recede, it’s time to start to look for who has been swimming naked.

A sign of coming attractions? Volatility ticked higher recently

VIX