Credit Tightening Accelerating Volatility

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The US equity market has been the sole standout performer in 2018, a year marked by global equity weakness and negative returns across fixed income and real assets.  This out-performance has been led by growth stocks, particularly technology.  Volatility returned this week as the rise in interest rates and inflation has raised concerns that economic growth will soften.  US growth stocks and small caps have now corrected 10% in October (vs. -6% for the S&P 500 and MSCI ACWI).  The market volatility is normal, especially given the tightness in the economy and rising rates. We do not see signs of a recession in the near future.

This correction has the look and feel of what we saw in February and prior episodes of market volatility in recent years. Earnings season begins today so earnings guidance from management teams should be important catalysts to either fuel or taper the recent spike in volatility.

We encourage investors to re-balance equity portfolios and consider the increased attractiveness of cash and short duration bonds. Specifically within equities, value remains attractive for the next phase of the market cycle, while emerging markets are oversold (the average Chinese stock has corrected 45%) and offer the greatest upside (and risk) of any asset over the long-term.