- Markets reacted strongly to what was possibly a fluke in the data in February. The sharp rise in volatility exaggerated the true significance of the sell-off.
- As the dust settles it becomes ever clearer that the “correction” was none at all. Even at its most extreme it was in line with traditional annual drawdowns.
- Yet, anyone betting on an extended expansion will ultimately worry about rising price pressures and a rear-guard fight by the Fed to raise rates. But the bigger worry is a rise in long term rates, which are under assault by the Trump administration’s fiscal expansion and the Fed’s balance sheet reduction.
- In addition, asset prices have become more stretched, investor confidence has continued to wane and volatility is on the rise, making it more expensive for investors to insure against down-moves in the stock market. In this context, a strong economy offers only scant comfort.
- This could be the year when investors will start interpreting good news for the economy as bad news for the market.