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What to Make of Recent Spike in Stock Volatility

What to Make of Recent Spike in Stock Volatility
(Dollar Photo Club)

By    |   Monday, 03 June 2019 11:28 AM

It seems that one thing we’ve been able to count on recently is stock market volatility. A big part of it, I believe, is that a growing number of market participants might be realizing that, historically speaking, we’re overdue for a recession, and nervous investors are keeping one finger on the trigger.

Considering that by some measures, the stock market recovery is now more than a decade old, investors should proceed with caution.

Going back to March, things looked pretty good. Trump was optimistic about the trade deal with China and the Federal Reserve’s announcement at the end of March indicated that it was becoming more dovish and planned to get out of the way. Add a decent quarterly earnings report and a good GDP Report on top of that.

So, heading into April, we had the sun, the moon, and the stars lined up perfectly for the U.S. economy and that seemed to help the stock market hit small record highs. Following that, Chairman Powell came out with remarks that some interpreted as being slightly less dovish.

Then, as the China trade deal started to fall apart, the markets seem to have gotten spooked and that has resulted in high levels of stock market volatility. Fortunately, those 600 and 700-point losses to the DJIA have been followed by big moves upward.

But what if the next big drop isn’t followed by a big gain? What if it’s followed by a series of even bigger drops?

Through history we’ve seen that the markets can get spooked for good reasons and sometimes they get spooked for no reason at all. So, which is it this time?

Well, the bond market, which is said to be smarter than the stock market, seems to confirm my concerns. Following the news that China would retaliate to Trump’s latest round of tariffs with tariffs of their own, the bond market reacted with bond spreads widening.

With growth slowing throughout Europe and in China, suddenly the U.S. economy seems to be the “cleanest dirty shirt in the world’s economic hamper.” Although our economy might seem like the better option, that doesn’t mean we’re out of the woods.

The reality is, our economy could be in jeopardy from the fallout of the trade war. That’s because increased tariffs can lead to two things. First, they can lead to higher inflation—which would likely prompt the Fed to raise interest rates, and that could stall the economy. Or, if the tariffs lead to higher prices, consumers might start spending less and that could lead to a lower GDP and further recession concerns.

Although Trump standing up to China and trying to get a good long-term deal done is in our country’s best interest, it doesn’t mean the path forward will be a smooth one.

In a way, with the stock market and GDP hitting record highs in March and April, all the good economic news sort of gave President Trump some room to play hardball with China.

Moving forward, I continue to see the flat yield curve as reason for concern. The latest flight to quality that has occurred after the recent escalation of the trade war has resulted in the yield curve getting flatter—only increasing concerns about a possible recession.

Ultimately, if other economies around the world aren’t that strong, and the U.S economy is the “cleanest dirty shirt” in the world’s economic hamper, it could lead to the other dirty shirts in the hamper making our shirt dirtier.

If you’d like to learn more about how to protect your savings from trade war volatility, visit theincomegeneration.com to download one of our free research reports.

David J. Scranton, CLU, ChFC, CFP, CFA, MSFS, is a nationally renowned money manager, Amazon Bestselling author, national TV host of Newsmax TV's "The Income Generation," founder of Sound Income Strategies, LLC, and CEO and founder of Advisors’ Academy. With over 30 years of experience in the industry, Scranton specializes in income-generating savings and conservative investment strategies.

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Through history we’ve seen that the markets can get spooked for good reasons and sometimes they get spooked for no reason at all. So, which is it this time?
stock, market, volatility, upswing
Monday, 03 June 2019 11:28 AM
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