Normal markets exchange money between asset classes, a shift from bonds to stocks, for example. The Dow plunged again Monday and demonstrated how quickly money can vanish from the radar screen. Global inventors sold equity, bond, and commodity positions and went straight to cash. No investment was left untouched which demonstrates that the risk-off trade leaves few options other than buying the U.S. dollar. The dollar index was up 1.08%. since Friday.
Friday's report on the strengthening of the U.S. economy will push the new and untested Federal Reserve Chair, Jay Powell, to raise interest rates sooner than expected. The tax cuts and repatriation of corporate offshore cash will further stimulate an already accelerating economy. Raising rates would make borrowing more expensive and help slow the pace of acceleration. The realization that the Fed may act sooner than expected spooked investors today, with a one-day sell-off not seen since 2011.
It's important to note that market contagion events are usually short-lived. Equities are still trending higher over the intermediate term, and if anything, stocks were expected to cool off. The S&P 500 returned 21.6% over the last twelve months.
Although you can't usually predict market shocks it’s possible to theorize how markets will transmute over the long-run. If the economy heats too quickly it could stir-up inflation. That would make a good case to hold commodities, real estate, and other tangible assets. Meanwhile, it’s too soon to make a case for a change in trend. The dollar continues it’s bearish decline over the intermediate term and interest rates continue to rise, two good reasons to continue to own stocks.
At Eureka Wealth Management, I analyze and provide investment solutions for my clients to help them reach their goals. Observations of global investment patterns can improve portfolio performance while minimizing downside risk. If you have investment concerns, you may schedule a free consultation by calling (760) 537-0791 or visit online at eurekawealthmanagement.com.