The Pension Boards Remains Positive and Watchful After Dow Volatility

Market Update by David A. Klassen, Chief Investment Officer

With the Dow Jones Industrial Average, the S&P 500 index, and other global equity markets now selling off after a strong January, we wanted to provide our perspective on both the price action and the pickup in volatility.

First, what happened?

The selloff began with a rise in interest rates, and bond prices began to decrease. This action resulted from good news of strong employment and wage growth. The concern is that the U.S. Federal Reserve (Fed) would speed up their rate hikes and cease the abundant monetary support in place since the crisis. Investors began to be concerned that higher wages meant that company profit margins will go down, especially if productivity does not show a corresponding increase. At the same time, some earnings disappointments materialized from a few giants, including Google, Exxon Mobil, Chevron, and Visa.  

Then there is politics and policy. We are coming up to the expiration of the extended government funding, which raises concerns that the government will shut down again. Although an interim solution will likely be found, the market finds uncertainty tough to handle.  The Republican FBI memo was released as well, casting a shadow over AG Deputy Rod Rosenstein, whom Mueller reports to. 

Finally, and perhaps most importantly, many quantitative and technical strategies in some markets using relatively new exchange traded funds (ETFs) had wagered that low volatility is here to stay. As volatility increased suddenly, these strategies have been forced to unwind, with a resulting disruption in equity markets that has been both speedy and profound.

Will the market continue to go down?

It is premature to say this yet, as market fundamentals remain relatively strong. We still believe that equity markets can deliver positive returns, but acknowledge that returns should be lower than last year.  What we do believe is that higher volatility is a certainty for 2018.

As of Tuesday morning, global equities are even for 2018. The anomaly, we believe, is the low volatility experienced over the past year, when the largest selloff was less than 3% for all of 2017! Our approach in these markets is twofold: 1) be diversified into markets other than the U.S., and 2) keep an eye out for opportunities in your portfolios that can accrue to your long-term benefit, when possible. Rest assured we will keep you apprised as events unfold over the next number of weeks and months.