Equity markets declined rapidly over the last several trading days as volatility returned after an unusually long period of stable markets. In conjunction, fixed markets have been adversely impacted by rising yields stemming from higher inflation expectations.
Although these rather dramatic price movements create sensational headlines and carryover reactions in the markets around the world, it is important to consider the reasons behind the volatility.
There has been no fundamental change to the current strength of the global economy. Economic data over the past week has been favorable with employment, pending home sales, and ISM manufacturing data exceeding consensus analyst expectations. Strengthening domestic economic data has contributed to higher inflation expectations and concerns over faster tightening by the Federal Reserve. While predicting the exact path for equity prices is a foolish undertaking and subject to change with sentiment, the long-term outlook for the global economy remains constructive.
Our Investment Strategy Team has not changed its outlook and recommends remaining fully invested. We believe market volatility, which hit all-time lows in 2017, can be expected to return to more normal levels going forward. Diversified investment portfolios can help to mitigate volatility over economic cycles.
- Equity market diversification across global markets may be more productive for investors as economic cycles progress at different paces around the world.
- Credit quality in bond markets remains strong. Slightly shorter maturity structures provide some insulation against rising interest rates, while maintaining favorable yields.
- If the market correction continues, a re-balancing of portfolios may be appropriate. Portfolio re- balancing is a key factor for those investors with long term goals.