Volatility: Better Get Used To It

In December and January we wrote a market outlook that named 2018 as the “Year of the Bond Market” based upon our view that interest rates would rise more than expected – and when combined with the end of quantitative easing (QE) – would start to affect risk assets such as stocks, credit, currencies and of course bonds.

The volatility of the past week reminds us that we are in the midst of an enormous and historic shift (some say experiment) from record global stimulus (QE) to tightening financial conditions (QT) as the Fed attempts to normalize monetary policy without inducing a recession. This is an enormously difficult transition and is partly why markets sold off this week, i.e. fears that rapidly rising interest rates may dampen economic growth. Unfortunately the Federal Reserve (all central banks for that matter) has a poor record of achieving the desired “smooth landing” of the economy, i.e. once (1994) in the last 100 years.

With the economy in transition, especially in 2019, we may have to get used to volatility. Click here to view full letter Spruce- Volatility Better Get Used To It- October 2018