Rolling the Dice

The third quarter is officially in the books, and it ended a dicey one.  Global stocks ended the quarter squarely in correction territory, the FTSE Global All Cap Index was down 10.5% for the period.   Meanwhile, the S&P 500 was down 7.3%, the EAFE was down 10.1%, and emerging markets were the worst at negative 17.1%.

Market volatility has decreased from its August highs, but remain elevated — so what’s with all the chop?  We could dedicate an entire blog to the potential reasons, but in general, volatility rises with uncertainty, and there’s plenty of that to go around right now.

Nerves were already rattled with the sell-off in Chinese markets and China’s slowing growth.  In September those nerves were further shaken by the US Federal Reserve.  The Fed’s decision to delay a widely expected interest rate hike raised questions about whether the US economy is strong enough to withstand Chinese side effects.

There are many who believe, including some members of Federal Reserve Board, that a rate increase is past due. The benefits of zero-bound interest rates may be marginal at this point.  And ultimately, a small and expected initial rate increase, followed by a slow, careful, and well-communicated policy is unlikely to be the cause for market ruin.

On the other hand, indecision and lack of confidence can breed the kind of fear that bear markets are made of.   In that respect, by not doing anything, the Fed may actually be rolling the dice — and markets don’t like that uncertainty.

Victor K. Lai, CFA

This blog is for informational purposes only. Nothing on this blog represents advice. Investing is inherently risky and involves the potential for loss. Victor Lai does not own any of the securities referenced in this posting. Clients of Bellwether Capital Management LLC may own shares of the securities referenced in this posting.