Volatility has continued to be a factor as rising interest rates and trade war threats have been the latest brick in the “wall of worry” to give market participants pause. Market technicians are comparing the characteristics to the decline on April 2nd to the year lows that were established February 5th and so far, things look less bad. Selling pressure on Monday April 2nd was not as extreme as in early February. This could be an indication that the selling is exhausting itself and a subsequent rise in signs of investor pessimism is actually a healthy backdrop for a rally. This coupled with a recent drop in the 10 year Treasury yield seems to indicate that much of the damage is now behind us and the bond market believes that the economy is cooling down.
Although much has been said about Federal Reserve tightening by raising short-term interest rates, globally there remains a lot of liquidity in financial markets. The breakdown of technology leaders, that have lead the charge in recent years, is high on our radar. Defensive sectors, like utility stocks, are starting to come to life and are showing signs of relative strength after a dismal first quarter when many high dividend payers lost share value during rising interest rates.
Rising volatility often signals leadership change. We are watching closely for new emerging leadership themes. Our aging economic expansion may not peak for several months but every expansion in history has been followed by a recession when fundamentals deteriorate. The madness of March is centered around the fact that much of the market is trading on momentum not fundamentals. Fundamentals have generally been pretty good for corporate earnings both domestically and globally. The rise in volatility looks much more like a correction than the beginning of a bear market.