I write about the recent bout with market volatility (aka - your investments are worth less this month) at the end of October here. It apparently did not scare the market back to new highs because November and early December have seen a continuation of October’s very own brand of ups and downs. Here are a few things to keep watching because I think they are the main drivers of this year ending on a sour note.
The China-US Trade Skirmish
Definitely the one with the most media attention so it often gets the entire blame. After a generation with losing trade rules and lowering/eliminated tariffs, a return of “taxes” on imported goods is a change from the status quo we have had for 20+ years. Right now it seems that both countries want to avoid pushing things much further right now (A G20 meeting cooled things off a tiny bit) but the end game is still undecided. The US Administration seems hell-bent on winning in the short term but the Chinese are content to play things slower. Lots of drama still to come, much of which will be noise for the stock market.
As I wrote here, Brexit is not going well. Theresa May survived a No-Confidence vote in Parliament but there are serious doubts whether the negotiated deal with the European Union will pass a vote. The EU seems entirely uninterested in reopening negotiations. It has raised the possibility of “no deal”. Luxembourg’s PM, Xavier Bettel was interviewed by a British journalist today about the impact of a “no deal” scenario. His reply; “Brexit was your choice, not ours” which is the political version of a mic drop.
Interest Rates Increasing
Interest rates have moved higher, led first by the US Fed and followed by the Bank of Canada. Not wildly higher but still, higher and climbing. The European Central Bank has spent most of the last half of the year removing monetary stimulus and European stock markets have been down since January. Whether they move out of negative interest rates next year or not is still up for discussion but they are, in effect, also tightening rates. Bonds have had a weak year because of this and the world’s economy has stalled out a bit. The last part is likely a more viable reason for the market volatility than the actual increase in interest rates. Which leads me to the last point…
Nia Kaissar of Bloomberg does a wonderful job of summarizing the impact of slowing earnings here. Remember that the stock market prices on future expectations NOT on past experience. If world trade is tightening at the same time as Britain and Europe are doing the worst separation possible AND interest rates are climbing, you tend to end up with a less robust economy which translates into less robust corporate earnings. We are now learning what that translates into.
I probably have missed a few items that are bubbling under the surface but the reality is that the global economy is not simple. It is a complex multi-bodied system and we have little ability to forecast exactly how it will turn out over the short term. Long term, I remain a serious probabilist and an optimist. The economy never goes in a straight line and thus, neither will investing. If you manage to stick around long enough you will reap the benefits from human ingenuity and technology.