Global equity markets are still hurting from last week’s sell-off. Yet the renewed volatility could mark a return to reality after an unusually long period of steady gains and may even foster a healthier investing environment over time.
The topic of housing finance reform has come in and out of focus on Capitol Hill since Fannie Mae and Freddie Mac (the government-sponsored enterprises, or GSEs) were taken into conservatorship back in 2008.
PIMCO takes a long-term view of markets and economies, one that anchors investment decisions during shorter-term periods of market volatility. Nonetheless, the dramatic return of market volatility has understandably unnerved many investors.
For many investors, it’s pretty unsettling to hear that the market’s “fear gauge” is suddenly on a tear. But that’s what happened over the past week. That fear gauge, formally known as the VIX, rose almost 300% in three trading days, signaling an end to the market calm that dominated in 2017.
The recent uptick in average hourly earnings (+2.9% y/y) and the surge in the government’s borrowing needs ($1 trillion plus in the current fiscal year) have had some implications for the underlying fundamentals. However, the outlook hasn’t been tumultuous enough to explain multi-100-point intraday swings in the Dow. Something else is clearly going on.
Last week, Treasury announced that it expects to borrow $617 billion in the first half of 2018, vs. $75 billion in the first two quarters of 2017, and announced increases in the sizes of its regular monthly auctions of notes and bonds. It should then be no surprise why bond yields are rising.
A strong economy, a booming stock market, and tighter monetary policy are all dollar positive. So why is the dollar down more than 12% since the start of 2017?
The global economy continues to grow, global manufacturing is solid, corporate earnings are strong, and we already are beginning to see here in the US the potential growth catalyst provided by the year-end tax legislation (bonuses are being paid, hiring is increasing, and capital investments are increasing).
The economic impact of the partial government shutdown will depend on how long it lasts. Government workers will still get paid, but those supporting government workers (food service, etc.) will not. Economic data reports and Treasury auctions may be delayed.
Our bear market dashboards compare current conditions to the conditions that shaped past market cycles. Those comparisons look favorable today, but several risks bear watching.