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Market week in review - Market Another week of ups and downs: Volatility batters markets again
3/04/2018

Another week of ups and downs: Volatility batters markets again

Article orignally published by Russell Investments on 30 March 2018 (Click here to go to original article) By Erik Ristuben

Week-in-review---Rob-and.jpg

On the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Rob Cittadini, director, Americas institutional, discussed the recent volatility that’s plagued equity markets the past two weeks.

Trade war worries fade, but privacy concerns jolt markets anew

U.S. President Donald Trump’s plans for tariffs on Chinese imports initially helped spark market volatility the week of March 19, Ristuben said, as worries over a trade war between the U.S. and China escalated. However, comments by top Trump administration officials the week of March 26 helped calm markets a bit, Ristuben said. “Both Treasury Secretary Steven Mnuchin and Commerce Secretary Wilbur Ross walked back some of the language surrounding trade wars, with Mnuchin saying he’s hopeful a trade deal can be reached between the U.S. and China, and Ross stating that the tariffs could be viewed as bargaining chips in trade negotiating talks,” he explained.

However, the relative tranquility in markets proved to be short-lived, Ristuben noted, as concerns over the privacy practices of tech giants like Facebook bubbled to the surface on March 27, causing stocks to tank once again. “This was the second period of market volatility in 2018—the first being the sell-off in early February,” Ristuben noted—“and what’s interesting is that, in both instances, non-U.S. equity markets outperformed the U.S.”

Why? Ristuben and the team of Russell Investments strategists believe it’s a sign that the market views U.S. equities as very expensive, and non-U.S. equities as more attractively priced. “We’ve had concerns all along about the high valuation of U.S. stocks—and the market seems to be agreeing,” he said—“because whenever there’s been any disruptive news recently, it’s been expressed in U.S. stock prices.”

10-year Treasury yield drops as spread between long and short-term yields narrows

Switching to bonds, Ristuben said that he believes yields on long-term U.S. Treasury notes have probably come close to their high-water mark for the current market cycle. “As of March 30, the yield on the 10-year U.S. Treasury is at 2.73%—and we expect it to peak around 2.8% in a year’s time,” he stated, adding that yields began dropping the day after the U.S. Federal Reserve (the Fed) raised interest rates by 25 basis points.

With the 10-year moving lower, the yield curve—the spread between 2-year and 10-year U.S. Treasury yields—has begun flattening, Ristuben said. The problem? When 2-year yields rise above 10-year yields, the curve becomes inverted—and inverted yield curves are not a good sign for markets, he said. “The yield curve is typically inverted before most recessions, “ he explained—“as it’s the bond market’s way of saying it thinks a recession is looming.”

With this in mind, whether or not the yield curve inverts later this year will be a big watchpoint for investors, Ristuben said. “If it does invert, it’ll probably be because yields on the 2-year U.S. Treasury note keeping increasing, due to additional Fed rate hikes later in the year,” he concluded.

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