The Time is Ripe—for Volatility
As the SP 500 index grew from 2700 on June 20th to 2940 on September 21st, the US equities have also enjoyed a steady climb. The increase of more than 240 points represents a 9% climb without much of a drawdown. Yet we believe this smooth sailing is masking lurking dangers. Ten-year Treasury yield, a benchmark for institutional investors, has flirted with 3%, and will probably test this level again. If the rate tops the 3% threshold, investment managers will have to reweight their portfolio and revalue their assets. This will no doubt put pressure on the equity markets.
Another headline risk is the potential of a trade war. The current administration has used tariffs or the threat of tariffs as an enforcement mechanism to curtail the US trade deficit. However, the true economic consequences have generally been ignored. Tariffs increase the price of imports for US households, making regular purchases more expensive. As a result, the Federal Reserve is mandated to put a lid on inflation and indirectly dampen the financial stimuli from the Trump tax cut.
In emerging markets, currencies are going through a massive devaluation. Citing one instance, due to a diplomatic standoff with the Trump administration, the Turkish lira is going through a devaluation and a large account deficit. Argentina is experiencing a similar currency depreciation, forcing the central bank to raise their interest rate to approximately 60% to defend its currency. Furthermore, Russia’s ruble has plunged due to US sanctions.
Overseas crises have been isolated, but might not remain that way. In our view, for the short term, tariffs, trade wars, hostile political rhetoric, and emerging market currencies’ depreciation could introduce volatility in the US equity markets. Nevertheless, it will be short lived, due to strong earnings, a robust job market, and financial stimulus from the Trump tax cut.
Paul Ho is Chairman, CEO, and Founder of Zygus Capital. Mr. Ho has executive oversight of the firm’s investments including broad strategy-setting, risk and resource management.
John Mucci is Director of Public Relations & Communications. Mr. Mucci oversees Zygus’ public relations, branding, marketing and communications.
Managing Partner at The Zygus Capital
6 年Hi Frank, you are correct. The depth of the drop was not something that I had in mind. Nevertheless, the downside case is another 5% drop. But, the long term trend is still up. We might test the SP 2900 in December due to strong fundamentals. Regardless the direction of the market, always hedge yourself and look for price confirmation. May the market be with you.
Private Market Secondaries/Cap Intro, Head, Senior Managing Director at TerraNova Capital
6 年Hi Paul, nice call on this, however I don’t believe this will be short lived as we now have mounting triggers from various other sources. Have you changed that view or do you still feel we’re done with the corrective phase? Thanks.