The global economy is strong. Europe has finally recovered from the self-inflicted wounds of austerity that followed the great recession. The economies of Asia are doing well. But investors are waking up to the reality that the cool headed stable management of the economy by Janet Yellen and President Obama is over. The euphoria that followed the huge corporate tax cut has been replaced by fear of inflation. The optimism that deregulation would increase corporate profits has been replaced by fear of the increased risk that comes from the lack of government oversight of markets.
Nothing has fundamentally changed in the economy in the last week. The job market is stable and the apparent jump in worker’s wages was actually barely keeping up with inflation over the past year for non-supervisory workers. Supervisors took the lion’s share of the wage increases so there still isn’t inflationary pressure from rising wages. bonddad.blogspot.com/...
What has changed is the perception of risk by professional investors. With the economy approaching full employment and with government bond yields beginning to recover from near zero levels, investors holding long term bonds face the prospect of potential large losses in bond values. With rising interest rates yields on new bonds become more appealing compared to stocks. Thus investors are foreseeing the possibility of lower stock prices and losses on bonds they hold now.
Today’s market drop is not an indicator of a fundamental change in the economy or that a recession is imminent. It is a return to reality by investors who have awakened to the risks of overvalued markets in the U.S. and the lack of prudent economic management by the Trump administration. Trump and the Republicans may call themselves conservatives but from an economic perspective they are risk takers and Obama was a cautious conservative. Investors who seek prudent management of their money would do well to invest in corporations and assets in northern Europe, not the U.S.