First Quarter 2018 — Volatility Makes a Comeback

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“Volatility may be rising simply because investors must digest more information every day” Alex Berenson

This year really got started off with a bang, with the Dow Jones Industrial Average continuing its record setting performance surging from just under 25K to a new record high of 26,616.71 by the 26th of January.

It was a breathtaking few weeks on Wall Street, and the best market start since 1997.

But then stocks abruptly turned down and entered a correction.

During the first week in February the DJIA experienced a pair of belly flops, with two shocking single-day losses of more than a thousand points each, making it the worst individual week for the index in almost two years. It was soon followed by a quick relief rally that recouped much of those losses.

Then, in keeping with the general theme of such a tumultuous month, the Dow fell almost 700 points in the final two days of the month leaving the market roughly 1600 points lower than the record mark set just a few weeks prior.

So, what happened to bring about all this upheaval and volatility to the markets? It could have been any number of things, but I believe it comes down to a couple of important economic reports that were drowned-out by all the stock market euphoria when they first came across the newswire.

Who’s Afraid of More Government Debt?

Just as the market was breaking out to new highs in January, the Treasury Department announced the Government would need to borrow $441 billion during the first quarter of the year. By comparison, this is the highest amount the country’s borrowed since 2010, when the economy was emerging from the worst downturn experienced since the Great Depression. The report went on to say officials anticipate the government would likely need to borrow at least $765 billion over the course of the year.

Debt, for those who haven’t noticed, is fast becoming one of the most worrisome problems here in the U.S., and a problem most politicians would prefer to ignore. Individuals, corporations, and even the individual States have been bingeing on low-cost debt for much of the last decade — not to be outdone, the Federal Government has more than doubled the amount it has borrowed since 2008.

And it’s become as much a global problem as it is a home-grown crisis. The biggest economies in the world, including China, Japan, and the European Union have all borrowed enormous sums of money with seemingly little regard for the potential consequences — Global debt has reportedly risen by as much as $60 trillion in the just the last decade.       

Meanwhile, the narrative of a strong, robust economy here in the U.S. makes it a little surprizing the current administration should find it necessary to take on so such much new debt, adding to an already enormous financial burden.

Interest Rates Are Going Up

The other problem I see roiling the markets was the news Chairman of the Federal Reserve, Jerome Powell, announcing he intends to continue a series of interest rate hikes introduced by his predecessor, Janet Yellen. Powell has said we can expect to see rates hiked three or four times this year alone.

Now, if there’s one thing Wall Street understands it’s the fact that a prolonged series of rate increases means the FED is purposing triggering a slowdown in the economy — put another way, the central bank is deliberately engineering the next recession. 

The Federal Reserve has but a few weapons in its monetary arsenal; the authority to raise or lower interest rates, control of the money supply, and the ability to purchase government debt. (a.k.a. Quantitative Easing)

The go-to weapon of choice when the economy becomes overheated is raising interest rates, as is the case now, to make borrowing more expensive and temper economic growth. The reverse is also true, and something we should all remember from the 2008 economic crisis when rates were pushed down to historic lows (near zero % levels) to stimulate economic growth.

What Seems to be the Problem?

Americans haven’t seen this kind of crisis-level borrowing by government since 2008, but what I find most troubling is the general lack of concern for the direction the leadership is steering our ship of state.

However, some investors are concerned, and the wild gyrations seen during February was likely the stock market’s reaction to the obvious disconnect between the Government’s plan of continued massive borrowing and what is ostensibly an awesome, ‘rip-roaring’ economy — again, do you really need one if you have the other?

As far as the stock market goes, action of this kind should come as a surprise to no one since, historically, stocks are always highly sensitive to anything considered detrimental to future economic growth.  

To the point, the one-two punch of the nation’s enormous debt being added to so significantly along with the FED’s stated intention to continue a series of interest rate hikes over the coming year(s) can, without any doubt, be considered detrimental to the growth of the economy.


Stocks took a pretty good beating during the month of February, and it seems everyone wants to know why.

The truth is, it wasn’t any one thing that sent stocks plunging, it almost never is. It’s even possible the selloff had nothing to do with my theory — could be investors are just getting a little nervous, and there’s a whole world of reasons for them to feel that way.

Many of the positive economic signs, or so-called ‘green shoots’, we see today here and around the world are purely debt driven — in other words, instead of growing our way out of it, we financed (borrowed) the entire economic recovery. It was all charged on Washington’s big credit card. 

But, rising interest rates are a clear indication we’re closer to the end of the debt cycle than the beginning, and we shouldn’t be surprised to begin seeing signs the business cycle is winding down as well. 

It’s been said the stock market is a gauge of the future health of the economy — if that’s true, what message is the market trying to signal with two of the biggest one-day point drops in history unfolding within just a couple of days of each other?

The bottom line for retirees: Market events during the month of February highlight the volatility of the stock market and the risk of too much reliance on stocks in your retirement plan.

Plan well.

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