Markets had a hard reset in Q4 with the election of Donald Trump on November 8th. Initially global equity markets plunged, but within hours began to recover and rallied strongly throughout the quarter, mostly on speculation that the new president would usher in tax cuts, deregulation and a sweeping fiscal spending program.
In the wake of “Brexit,” central banks reasserted themselves over markets in a big way in Q3, sending bond yields to historic lows.
The recent wave of populism in the developed world is targeting institutions that have been supportive of capital markets for the better part of 70 years. To the extent these political movements prevail, they would likely carry negative economic consequences.
Events in Q1 took the Fed off message and “Brexit” further complicated its story
Given the limited set of policy tools, the Fed seems to want to play it safe and is reluctant to raise rates until it has strong evidence of inflationary pressures
The smooth December lift-off in rates was derailed in January by a rolling set of concerns that culminated in markets pricing in (at least for now) a more gradual pace of interest rate tightening than previously expected.
The Central Bank divergence story – the idea that instability in capital markets would be driven by diverging monetary policy among the world’s largest economies - is alive and well but evolving, with more pain in store for interest-rate sensitive investments
As of this writing, the S&P 500 has gone 1,302 days without a correction of 10% or greater, the second longest run since World War II. As far as the untrained eye can see, risk appears to have disappeared from markets.
Larry Cao, of the CFA Institute, writes that risk factor diversification - like that used at Rain Capital - is one of the most important advances in portfolio construction techniques in recent decades and is increasingly used by sophisticated institutional investors.
The inflation conundrum dogging the US economy right now has a lot of observers scratching their heads. The economy clocked 5% real GDP growth in Q3:2014 and an estimated 2.6% in Q4. Unemployment at 5.6% is at levels that have historically begun to generate wage inflation, but there is little to speak of. Explanations range from labor market slack to deflationary pressures from abroad, but economists at the Fed are pointing markets to a simpler answer: zero interest rate policy.