Good morning,

 

Volatility has picked up noticeably in recent weeks, with large swings higher and lower. To make matters more painful for portfolios, bond prices have moved lower, suggesting they have not offered the kind of diversification benefits investors have come to expect.

 

Global equity markets have had a poor year so far. But, periods of market weakness are not uncommon. In fact, the U.S. equity market, which is the most widely followed, has averaged at least one sizeable decline (i.e. 10% or more) every year since 1975, with the average fall being nearly 20%. Yet, the U.S. equity market still managed to generate a positive annual return in 35 of the past 46 years. In other words, dealing with market volatility is part of the investing experience.

 

The primary culprit behind the weakness seen in markets is inflation.  Inflation expectations have been creeping higher. This explains the aggressive actions undertaken by central banks who have been raising interest rates. Yet, there may be some relief on the horizon. Recent inflation readings in the U.S. have hinted that growth in core prices, excluding food and energy, may be on the verge of starting to slow.

 

Periods of market turbulence, such as the current one we are experiencing, can understandably cause some angst. Yet, it’s a relatively normal phenomenon that occurs from one year to the next. The key risk remains whether inflation becomes entrenched in the expectations of businesses and consumers. I’ll be watching this closely, in addition to the odds of a U.S. recession which remain low for the time being.

 

Tim