Markets at New Highs Amid Rising Uncertainty
New year, more new market highs, more chaos. International stocks continue to outperform, and interest rates remain unchanged for the year. For historical perspective on volatility and market cycles, see Uncertainty Has Risen.
The current investigation of Chairman Powell has drawn a negative reaction from both sides of the aisle, as well as from past Federal Reserve chairmen and current Federal Reserve governors. The White House has blamed U.S. Attorney Jeanine Pirro, who responded by saying the Fed had not responded to questions sent over by her office on Friday. This could be another TACO (Trump Always Chickens Out) news item.
Along with Venezuela and Iran, this all appears to be a big distraction from the Epstein files. Geopolitical risks and their impact on markets have been discussed previously in Geopolitics and Markets.
Market reactions to all this chaos have been a series of new highs with some notable asset-class shifts. Large value is outperforming large growth so far, a shift away from the Artificial Intelligence trade. Mid- and small-cap U.S. domestic stocks are also outperforming large-cap stocks. All international markets are outperforming U.S. large caps.
This shift in performance among different asset classes highlights the value of diversification and the difficulty of believing you can consistently select the asset classes that will outperform. We are certainly not that smart, which is why we utilize fully diversified portfolios. You can read more about this philosophy in Why Diversification Matters.
Inflation and Policy Noise
What about inflation? Prices continue to increase beyond the Fed’s 2% goal but came in below higher expectations. Affordability—the theme of the past six months and the upcoming mid-term elections—is attracting attention. Related commentary can be found in Inflation and Interest Rates.
The administration has proposed capping credit card interest rates, preventing large corporations from purchasing single-family homes, and today even floated a healthcare bill. If this doesn’t have your head spinning, I don’t know what will. The likelihood that any of these proposals become law remains slim to none.
Oil, Geopolitics, and Shifting Influence
Oil prices have been on a roller coaster with both Iran and Venezuela in play. President Trump has created a new interpretation of the Monroe Doctrine, which originally prevented new European settlement in the Western Hemisphere in the 1820s but did not force existing settlements or colonies to be surrendered. Related energy market commentary: Oil and Energy Markets.
It appears that spheres of influence have reemerged as policy proposals. The issue of Greenland, with threats on both sides, could cause permanent changes in foreign policy strategies, potentially giving license to other world powers to exert dominance over their own spheres of influence. In other words, the world order established post-World War II is being disrupted. How successful these efforts will be remains to be seen.
Markets and Perspective
So far, there appears to be little impact on domestic U.S. markets—until there is. And timing that moment is a waste of time. For additional perspective, see The Market Timing Myth.
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