Market Volatility Update:
Extended bull markets have led to periods of decreased economic activity and often culminates in the form of a large-scale market correction. There has also been a considerable amount of volatility lately, a side effect of geo-political activities and the rise of computerized trading. The combination of these two can cause more volatility than what is normally expected. The Federal Reserve raising the interest rate is also putting stress on the market. On Wednesday, investors were not happy with the decision to increase rates and acted accordingly. With trade rhetoric becoming more hostile and the monetary policy being tightened, it is reasonable for investors to be cautious.
Although some investors are expecting a market correction, it is important that we establish a difference between now and 2008. What led to the subprime lending crisis was a combination of a lot of different factors, which in turn crushed the financial market. This was a large scale breakdown. What we are seeing now is a short-term correction. It’s as if in 2008 we had our check engine light on for years but ignored it and eventually the car was too far gone. Now, the markets know that the check engine light is on, and they are currently on their way to the shop. Below, we provide more color on the pressures weighing on the market:
- Algorithmic and A.I. Traders: Many trading algorithms will trade based on headlines, therefore causing not only the computers to drive the price down, but compounding investors’ concern due to large price movements. The algorithms are largely to blame for the large swings in major U.S. indices.
- US-China Trade Uncertainty: The arrest of Huawei’s executive has caused sharp losses in major U.S. indices and will add pressure to China on following through with trade concessions. The market is still in the dark, and fears that no progress is being made.
- Interest Rate Worries: The Federal Reserve has been aggressive in their approach to rate hikes as they try to keep inflation under control. This approach has led to slowing economic growth in the past. The market is prone to volatility when the Federal Reserve begins to discuss interest rates.
With the following in consideration, we have made the decision that we de-risk the holdings in your portfolio. As we undertake this restructuring, we are considering all outcomes, yet we still remain confident in the strength of U.S. equities, and feel as if that growth will continue throughout the beginning of 2019. We feel as if it is better that we prepare early, rather than wait until it’s too late.
This year was a great year, but we plan to make 2019 even stronger. The family at Buffalo First Wealth Management wishes you a happy holidays.