There were a lot of scary market moving events over the last few weeks. Rising tension in North Korea, bombings in Syria and Afghanistan, not to mention elections in France and newly scheduled elections in the UK. Even the U.S. political agenda is impacting the markets. The latest is the talk of the potential government shutdown as we hit the debt ceiling, while the markets are all still processing what the failure to pass health care legislation will mean for tax reform and stimulus spending. This roller coaster rode gold up to $1,289 per ounce and the interest rate on the ten-year treasury down to 2.17%. The S&P was off close to 3% at one point from its recent highs in the beginning of March.
Funny thing about roller coasters: they can give you quite the scare, but you end up in the same place you started.
Despite all these ups, downs and occasional screams we have not changed our view. We still expect that the U.S. may be on the verge of modestly faster growth and higher inflation due to improving domestic and global economic fundamentals as well as policies articulated by the Trump Administration. Policies like tax reform, infrastructure spending and regulatory relief, if implemented, could enhance short-term U.S. GDP growth. However, in the medium and long-term any new policies would need to push against the headwinds of cyclically high debt levels across the U.S., low productivity, the drag from demographic shifts and a stronger dollar, and reduced global trade.
This is not a scary ride for the bond market, bringing with it the potential for some slightly higher income and the prospect of continued economic growth – just keep your hands inside the coaster!
Source: Bloomberg, The Financial Times