Finance Loonnnng-running bull market Perhaps the simplest explanation for the current bout of volatility is that we haven’t really seen any over the past several years. Depending on how you define your start and end points, it’s been more than 10 years – since the big meltdown of 2007/2008 – that the United States equity market has experienced a significant bear cycle. Of course, bull markets don’t die of old age alone – there’s almost always some other “catalyst” that starts the bear cycle. However, it’s also true that the sheer length of the bull market heightens emotions and makes investors more susceptible to fear-based reactions in the face of what we might otherwise see as perfectly normal economic and/or political events. Rising rates In the wake of the 2007/2008 financial crisis, central banks around the world engaged in an historic effort to lower interest rates and initiate economic programs that would encourage corporate investment and consumer spending (such as quantitative easing). The idea: lower interest rates would encourage business owners and individual consumers to borrow which, in turn, would lead to higher spending which, in turn, would lead to economic growth. The good news: the program seems to have worked. Undoubtedly, there was hardship – many people lost their jobs, their homes and their savings too. But looking from a macroeconomic perspective (as all central banks do), most parts of the global economy have managed to avoid slipping back into a deep recession, which would have been even more painful. Now that many of the world’s economies are growing stronger, it’s time for this era of ultra-low interest rates to end. But are heavily indebted consumers fully prepared for rising rates? They’ve certainly been warned, as governments sounded the alarm and encouraged both companies and individuals to pay down debt while rates are low. But if interest rates rise too fast, it may cause everyone to reign in their spending immediately; some may even be unable to pay back their debts at all. All of this could have an obvious and significant impact on business growth. And that has the market worried. Political uncertainty We live in...ahem...“interesting” times. And while drama in Washington and rising geopolitical tensions may make for entertaining headlines, they rarely make for stable stock markets. Pick your poison: turmoil in the White House; tensions between Russia and the West; sabre-rattling in North Korea; the ongoing civil war in Syria; the rise of populist “strongmen” around the globe. There seem to be plenty of things to be worried about these days. It’s not always easy to understand how such events will affect the companies we invest in. But, as long as there’s a threat that the goings-on in other countries will interfere with “business as usual,” you can expect volatility to continue in the stock market. Political uncertainty causes companies to delay spending programs, stop hiring new workers and put expansion plans on hold. That’s rarely good for investors. Trade war coming? Donald Trump has spoken at length about trade deals (spoiler alert: he’s not a big fan) and correcting the U.S. trade deficit (whether real or perceived) with Mexico, Canada, China and other nations. Lately, he’s backed up that position with threats of ripping up trade deals and implementing tariffs against foreign goods. China has responded in turn, recently slapping some $50 billion in highly targeted trade tariffs on a variety of U.S. goods. Is this a “hardball” negotiating tactic, intended to lead to a renegotiation of existing trade deals? Or the first salvo in a global trade war? No one really knows. But until we do, we can expect equity markets to be volatile, and companies with international business to be particularly so. CSANews | SPRING 2018 | 31
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