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First quarter 2018 is in the books. Now it is time to assess some of the significant economic changes worldwide and what that may mean for investors.
First, let’s take a quick look back at last quarter. It seems the magic finally broke. Where we saw virtually no volatility during all of 2017, February and March had significant market fluctuations around the globe. Why did this occur? There are many reasons, but we will highlight some of the basics here.
Last year investors enjoyed a steady increase in most stock values fueled largely by increased corporate earnings and the expectation of tax reform. Now we are dealing with new uncertainties. The stock market does not like surprises, so the current number of topics that are up in the air is unsettling, to say the least.
1. The Fed is tightening money supply as part of their monetary policy plan. While this is not unexpected, investors, already jittery from recent market fluctuations, are hoping the Fed doesn’t upset the apple cart and raise rates too much too quickly or not enough to prepare for the potential end of the business cycle.
2. Fiscal policy on the other hand is moving in the opposite direction, where the recent tax law change is designed to stimulate the economy. This is usually something we would see in the first half of a recovery, not the last half where we are currently perceived to be according to Bill Greiner, chief investment strategist with Mariner Wealth Advisors.
3. Monetary policy worldwide is also moving in the opposite direction currently than the United States. The European Central Bank (ECB) is continuing with Quantitative Easing while the U.S. is tightening.*
4. Trade tariffs have certainly rattled the equities markets recently as they bring more uncertainty. How will China respond? Already as of this writing we are seeing Chinese tariffs imposed on some U.S. exports. Could this hurt the agriculture business here at home? This also seems to be leading into more of a political stance and possibly national security issues with allies receiving special exemptions to the tariffs. President Trump is identifying allies (Europe, Canada, Mexico) and targeting China and Asia in general. The next agenda item could be intellectual properties and theft, which could cost up to $600B per year in lost revenue.*
5. Mid-cycle elections for the House and Senate will occur this year. This could be a catalyst for significant changes in leadership, which could create even more uncertainty.
So, market volatility has returned. Investor sentiment is showing disfavor with the trade tariffs and concerns about possible retaliation, rising prices and potential economic slowdown. In addition to any new surprises, we are also facing the inevitable end of the current economic recovery cycle. Even though this has been a very slow and longer-than-average recovery since the Great Recession, it will eventually come to an end.
Many analysts agree the end is not imminent; however, we are likely well past the halfway mark.
Therefore, investors may look worldwide for continued diversification where other countries are still in the growth pattern of their recovery. Greiner sees continued opportunities in Europe for the next few quarters. First, they still have monetary easing and second, their valuations and therefore stock prices are more reasonable than here at home.
Regardless of whether you are a nervous or a well-seasoned investor, these times may call for a professional review of your current portfolio based on changes in the economy and marketplace but most importantly, potential changes in your personal financial plan.
* Bill Greiner, Mariner chief investment strategist: advisors call March 23, 2018 and Washburn University lecture
Patricia Kummer has been an independent certified financial planner for 31 years and is president of Kummer Financial Strategies LLC, a Registered Investment Advisor in Highlands Ranch. Kummer Financial is a seven-year 5280 Top Wealth Advisor. Please visit www.kummerfinancial.com for more information. Any material discussed is meant for informational purposes only and not a substitute for individual advice.
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