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Keep Calm and Trade On: Market Volatility Is Normal

Keep Calm and Trade On: Market Volatility Is Normal

Thursday, 05 April 2018 09:28 AM Current | Bio | Archive

I don’t think it’s an overstatement to say that we now seem to have entered into something that looks like a media headline war that is all about what is still a “relatively minor trade dispute”, for the moment at least, between the United States and China.

Investors could nevertheless do well keeping in mind that there is a risk that this could spill out of control.

For the trade itself, the 2 sides have set out their tax (tariffs) lists with a delayed start. This is clearly to allow a deal to be done and the chances are that a deal will be done. Even if a deal is not done immediately, there is little risk of an escalation into a full-scale trade war whereby global trade volumes would be falling as a direct consequence of protectionism.

The amounts involved so far are too small, and President Trump is pursuing economic policies that will further increase the size of the U.S. current account deficit, which does mean an increase in trade and coincidently an increase in U.S. living standards.

Today, the U.S. trade deficit increased to a near 9-1/2-year high in February as both exports and imports rose to record highs, but the shortfall with China narrowed sharply, Reuters reported.

The Commerce Department said on Thursday the trade gap rose 1.6 percent to $57.6 billion. That was the highest level since October 2008 and followed a slightly downwardly revised $56.7 billion shortfall in January.

In the meantime, the equity market volatility is a reminder that equity markets are “normally” volatile. One might think that this reminder is not necessary, but apparently it is.

Do equity markets matter to economics? In fact, not that much.

There is unlikely to be a significant negative wealth effect that changes economic behavior from the recent equity markets’ moves. Equities are not that widely owned in the U.S., and most people are far more concerned about their employment and employment income than the daily fluctuations of the equity markets.

About companies seeking to raise capital, in modern times we cannot express real concerns about the “cost of capital” for companies just because the equity market has had a bad day. These days, there are plenty of other sources of “cheap” capital available.

Finally, this week, the San Francisco Fed President John Williams who is a monetary economist and a banking-industry outsider was selected to run the Federal Reserve’s powerful New York branch to, among a lot of other things, help oversee Wall Street, effective as of June 18.

Williams is considered as a centrist on monetary policy and maybe it could be interesting to recall that at the end of February Williams said he sees 3 to 4 rate hikes this year and that he expects U.S. unemployment to fall to 3.5 percent this year. Williams has also repeatedly stated that he does not actively monitor financial markets because he wants to focus on longer-term trends.

Williams is considered as a “hawkish” member of the Fed, which has not been always the case.

For investors it might make sense to try to look somewhat deeper into “The legacy of the Quantitative Easing (QE) era” at the moment that Mr. Williams, who as N.Y. Fed President will have a permanent vote at the Federal Open Market Committee (FOMC), the Federal Reserve is starting its tricky years-long task of trimming its $4.5-trillion balance sheet down to $3 trillion or so, while questions loom over how the U.S. economy as well as the markets will respond.

Williams and Dudley have both been reliable advocates for years of near-zero rates to drive down unemployment. Interestingly, in 2016 Williams was among the first of the so-called doves to back more frequent hikes, in part due to worries over inflation that has not yet materialized.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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In the meantime, the equity market volatility is a reminder that equity markets are “normally” volatile. One might think that this reminder is not necessary, but apparently it is.
investor, market, volatility, normal
Thursday, 05 April 2018 09:28 AM
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