In the early portions of 2018, global stock markets experienced several instances of “flash crash” activity, which is essentially a major decline in share prices that is not preempted by a specific economic event. For many investors, this activity took them by surprise and it led to significant losses in several key market assets classes.
The events put the global marketplace in a precarious position, given the rising valuations seen in share prices in most of the world’s commonly watched benchmarks. But when taking into consideration the strength of the underlying macro trends, there is far less cause for concern. The U.S. GDP growth numbers recently came in at 4.1%, which is very strong relative to the historical averages.
This suggests that the pro-growth agenda put in place by the Trump administration is having its desired impact on the overall output levels. These quarterly averages in U.S. GDP (since 2012) can be visualized using the chart below:
Source: U.S. Bureau of Labor Statistics
Of course, this positive trend activity makes it much more difficult for the Fed to take a passive stance on the question of interest rates. Changing monetary policy at the Federal Reserve can have a direct impact on interest rate levels and this makes it difficult for some asset classes to make consistent gains on a relative basis.
The impact of higher interest rates has actually inverted the yield curve in ways that typically suggest a recessionary period in developed economies. There are reputable reasons to explain why this might not be the case in the current market environment. But it is still prudent for consumers to take a proactive approach in managing their financial decisions and household budgets. This can be done more objectively through the use of budget tracking tools which provide clearer accounting records and suggestions for better budgeting strategies.
For these reasons, it is important for individual investors to have a diversified portfolio, and some analysts have even gone so far as to suggest that it is time to bail out of bonds into the relative safety of stocks. In most cases, the potential for gains in stocks will outweigh the potential for gains in bonds (on a percentage basis), so this is not necessarily something that should be viewed as cause for concern.
Most of the data seem to be suggesting the opposite at this stage, and so we could be shaping up for some very interesting moves in the financial markets as we head into the final parts of this year. In any case, the stock market continues to trade at elevated levels and this suggests that consumers will need to maintain at least some sort of defensive posturing in regular daily purchases and in the investments that are included in retirement and savings accounts.