Three steps and a stumble. Investors may soon find out if the Wall Street adage holds true. Both US equity and bond markets seemed to celebrate last Wednesday’s Fed decision as bond investors saw prices rise and yields fall. Ignoring what appears to be a Fed intent on normalizing rates, bond investors held on to their view that the reasons for purchasing expensive paper still held true.
With core inflation in this country running at 2.3% over the past year and the overall economy and employment on solid footing, two more and maybe three rate hikes are possible this year. 2018 may look the same. The thirty-six year bull market in bonds seems to be at the end of its stay. In December of last year, 3 trillion dollars was pulled from the global bond market.
Where did it go? The equity markets. Not surprising with the promises of fiscal policy taking the baton from monetary policy. But, with many promises made and few kept, risk is lurking under the bed in a dark place like something scary in a M. Night Shyamalan film. Volatility likes dark places too, and when it crawls out of the dark equity and bond investors will have plenty of reason to tremble.
With bond and equity volatility at historic lows, prediction is useless and those who attempt will get it wrong. Momentum is a real factor in determining returns and the irrational behavior of investors can influence market direction. Markets are always changing and investor behavior is fickle and unpredictable.
What’s called for is maintaining a disciplined approach to a well thought out methodology and making sure you’ve communicated it clearly to your clients in writing.