Finally overcoming the first bout of volatility not seen since 2016, the S&P 500 is up 2% so far this year. This return is thanks to last week’s stellar performance. But what caused this volatility and should we expect more in the near future?
On top of the usual headline news, economic factors appeared to have had the most influence on the recent market turbulence. The Federal Reserve pushed rates higher, thrusting the 10-year Treasury yield to 3%, something not seen since 2011^1. This has caused panic as equity investors begin to realize that they can earn more on safer, government-backed assets, such as treasury bonds. On top of that, a dramatic sell-off in the Argentinian peso, forcing that government to push their own bond rates to above 40%. This was the perfect storm for a short-term, stronger US dollar, which rose 3.5% in 7 days^2.
With equity markets now recovering and the US dollar retreating ever so slightly, there should be little to fear with equity markets going forward in the short-term. Stocks will continue to receive the benefit of increased shareholder distributions from overseas earnings, hugely active merger activity, and most importantly, a lack of options for where investors can put their money.
This doesn't mean that you should not be cautious. In fact, there are new trends in various sectors of the economy emerging and are important to watch for. Oil has broken a significant price level, technically, and its bullish trajectory should be taken seriously. This comes after 4 years of a bear market in this asset class.
Staying diversified is hugely important. Keep your portfolio consisting of equities, both domestic and international, bond duration should be shorter considering rates will continue to rise and include asset classes to take advantage of the new commodity inflation that may be emerging, such as oil.
At Eureka Wealth Management, I help my clients stay diversified and include the asset classes that may outperform in the current environment. For free portfolio review contact me at 760-537-0791 or online at eurekawealthmanagement.com.
^2 US dollar compared to a basket of currencies (tracked by the US Dollar Index (DXY))