Transitional phase at Fed may stir up a few market wobbles


Fund Commentary
1 Mar 2018


The US equity markets continued their rally in January, with the S&P 500 gaining 5.6% and posting 14 new closing highs throughout the month. Investors’ risk appetite appeared to be boosted by strong momentum, income tax expectations, good earnings and positive guidance for 2018.

hroughout the month, sector performance continued to vary significantly: whereas the consumer discretionary segment gained 9.0%, utilities declined by 3.2% as the cost of financing increased.

From a macroeconomic point of view, the new year started on an upbeat, with world growth steadily becoming more broad based, as evidenced by many macro indicators. Investors have become increasingly vigilant recently, as their expectations have caught up with this movement. The exceptional market stability in 2017 is unlikely to extend through to 2018. Indeed, the lack of volatility in equity markets over the past 18 months has been an anomaly, with the volatility currently starting to spike for several reasons:

As the Federal Reserve continues down a path of gradual tightening, investors are starting to discuss the potential withdrawal of accommodative monetary policy, not only in the US but also in the rest of the world. In addition, the Investment Adviser notes that the current tightening cycle of the Federal Reserve has been exceptionally slow compared to the past. Going forward, the Investment Adviser expects the pace of tightening to be of increasing importance for the markets.

Further, in addition to keeping a close eye on inflation expectations, markets need to learn how to interpret a new Fed Chair (Jerome Powell) as well as other new board members. With Janet Yellen’s departure, only two of the seven Board of Governor members have kept their position. Currently, there are four vacant positions on the board, yet needing to be filled. The Investment Adviser thinks that this transitional phase may stir up a few headline-driven market wobbles.

Given the recent volatility, confidence needs to be confirmed. Even if the markets do stabilise in the short term, they have already reminded investors that expectations on the pace of gains must be more measured, especially at a time when, although growth rates remain robust, incremental changes in global growth surprises are hitting levels from which they have typically moderated.

Nevertheless, volatility also creates opportunities and the Investment Adviser has taken advantage of recent turbulences to add solid, high-quality positions with sound valuations and will continue to redeploy cash as the market stabilises.

The views and statements contained herein are those of the Eric Sturdza Banking Group in their capacity as Investment Advisers to the Fund as of 16/02/18 and are based on internal research and modelling.