Calm returns ahead of US inflation data, could lead to more fireworks

A big bounce on Monday for equity markets. Financial journalists love to point out this was the biggest two day rise since the last big two day rise. These are all meaningless statistics; short term volatility is part of the world an equity investor takes on for the superior returns he gets from the asset compared to other asset classes. What was inevitable was that this correction was going to be swift and leave little time to react. Having said that reacting in haste during these times can often be more painful than sitting tight and waiting for the dust to settle. Investing in stocks should be considered in the same way to buying your house, both are needed for long term security and not something to be traded on a whim.

So where to now? US treasury yields have remained stable over the past couple of days and the much anticipated 3% yield on the ten year has yet to come to fruition. If sentiment is an indicator of which direction asset prices should go, sentiment in the bond market seems extremely bearish, that may provide some support.

What to think now? Our weekend column did try and point out, after the fall equities have had, that this may have created something of an opportunity for long term equity investors. In earlier blogs we suggested the floo,r based on some valuation matrix, could be around 2550 for the S&P 500, so far the low was 2530. This bout of volatility may have time to run further, and the seeds of the next bear market may be in the early stages of gemination but, as yet many of the other ingredients for the seeds to blossom, may be missing, but we know what they are. Increase in take over activity, weakening credit markets, poor earnings outlooks and defensives outperforming.

The UK inflation rate remained at 3% for January, which will add to the believe that the Bank of England are more likely to raise interest rates in May and possibly a further time before the year is out. Later on Wednesday we get the US inflation data for January. That data is more likely to have an impact in global equity and bond markets. If markets have now adjusted to the idea of a modest change in inflation expectations as opposed to the idea that inflation is about to take off, volatility in both bonds and equities may continue to subside.

Posted on February 14, 2018 .