A Market Correction
The markets trembled and suddenly everything seemed more fragile as they unexpectedly adjusted to a world where inflation is actually increasing and interest rates are rising. A few observations:
- As of February 14, the yield on 10-year sovereign spreads had increased by:
- 0.34% (to 2.39%) in Canada;
- 0.51% (to 2.91%) in the United States;
- 0.35% (to 0.78%) in Germany.
- Interest rates are still low on a historical basis. In the United States, the markets’ implicit expectations, calculated on the basis of interest rate options, have now caught up with the Federal Reserve’s projections with three 0.25% rate hikes in 2018.
- There is still a consensus that the global economy will see robust growth in 2018. Its momentum is strong, and an ocean liner can’t make a quick 180-degree turn!
- On February 14, it was announced that the U.S. rate of inflation rose by 0.545% in January, mainly because of higher energy prices. Even though the increase was slightly higher than expected, the markets were positive on the day, implying that a portion of their adjustment is complete.
- The markets’ decline amid expectations of rising earnings reduced valuations. The S&P 500 forward price-earnings ratio fell from almost 20 to 18, back to where it was at the start of 2017 and close to its 2015 level.
- Over the past 50 years, all bear markets have been accompanied by recessions caused by the policies of central banks that ultimately took their key rates above the level that the economy could support. The good news is that we aren’t there yet! However, the last three recessions, which were accompanied by bear markets, were due to financial crises caused by bubbles that were not obviously apparent.
There is a risk of more turbulence during the year as the level of concern increases against a backdrop of high economic and earnings expectations. We will continue to monitor the situation actively and will keep you informed.
This review has been prepared for the general information of our clients and does not constitute an offer or solicitation to buy or sell any securities, products or services and should not be construed as specific investment advice. All opinions and estimates expressed in this document are as of the time of its publication and are subject to change. The information contained in this document has been obtained from sources believed to be reliable, but we do not represent that it is accurate or complete and it should not be relied upon as such. The content of this presentation is proprietary and should not be further distributed without prior consent of Gestion FÉRIQUE.