While we ended the first quarter with a fairly robust economic background (which has continued into the first month of Q2), we’ve also seen some market volatility unfold.
Volatility is no cause for concern, especially if you understand the source.
Here are two reasons for the current market volatility in mid-April 2024:
1. Inflation and interest rates have contributed to market volatility
The March 2024 CPI report came in higher than expected for a third straight month, confirming the impact of inflationary pressures.
Much of that CPI increase is coming from shelter prices. Transportation services and other ancillary components also contributed.
This higher-than-expected data is causing volatility. Experts started the year anticipating six rate cuts and are now anticipating just two cuts. This disconnect means higher interest rates and, therefore, equity price volatility.
Why inflationary volatility is not a cause for concern
Inflation may not meet expectations, but there is no need to worry. The CPI peaked at 9%, so the overall inflationary trend is still down, sitting at 3.5%.
We’ve also previously discussed the impact of economic expectations versus reality, and it’s important to remember how a disconnect can contribute to short-term, sometimes irrational, volatility.
In addition, consumer resiliency is strong, and consumers have continued to spend, with retail sales for March turning out notably better than expected.
This is because inflation does not affect everyone the same. The combination of a large share of the CPI increase coming from shelter prices and a majority of people owning their homes means a large part of the population is not feeling the effects of inflation as poignantly as we may believe.
Will interest rates drop?
Interest rates will likely start to fall later this year, affecting the economic and market landscape.
For example, since COVID, we’ve seen an acceleration in money market assets. When rates inevitably drop, these money market assets will redeploy, likely into equities.
Money market assets peaked last week at $6.1 trillion, so it’s important to be prepared for this shift once interest rates drop. For more on this, review insights from our team regarding U.S. money market assets.
2. Geopolitical tensions have contributed to volatility
Geopolitical tensions, mainly in the Middle East between Israel and Iran, have created unnecessary volatility, especially in commodities.
While investors often want to hedge against geopolitical risks, this is not always a reliable decision. The cost of hedging incorrectly can be more detrimental than it’s worth.
Our Investment Policy Committee monitors the geopolitical landscape closely, carefully adjusting our approach if necessary.
Our Response to Market Volatility: Portfolio Pivots
Our Investment Policy Committee has tactically adjusted to current market volatility, moving slightly away from equity market participation (up to 8% across select domestic strategies). This allows us to move into short-term treasuries and reduce our volatility profile.
When we see some kind of resolution, we are prepared to jump back into equities at what are hopefully cheaper, “discounted” prices.
It’s important to note that our team is not making excessive adjustments that could be detrimental, but rather, they are using intentional pivots that create leverage and opportunity for our clients.
Volatility is a part of investing, but understanding the source and having experts you trust to make the necessary adjustments is crucial for any investor.
If you’d like to learn more about the causes and proper responses to market volatility, reach out to our team at [email protected] or fill out the form below.