Understanding the Recent Equity Market Volatility

February 7, 2018

February 9, 2018

U.S. equity markets began 2018 on a positive note with the S&P 500 Index rallying 5.7% while the S&P/TSX Composite Index declined 1.4% in January. However, in early February, markets came under material pressure as the U.S. 10-year government bond yield approached the psychologically important 3.0% level and equity market volatility surged higher. The problem: too much of a good thing. Rising Yields Spook Equity Markets INVESTMENT STRATEGY GROUP 160 150 140 130 120 110 100 90 80 S&P 500 Index S&P/TSX Composite Index

After nearly a decade of highly accommodative central bank policy, which was needed to bolster growth and inflation expectations after the 2008 Great Recession, global growth today is synchronized and robust. Unemployment rates on both sides of the border have been grinding lower for years and the latest U.S. employment report showed brisk wage growth. Additionally, oil and other commodity prices have rallied materially in the past couple of years. Also, the Trump administration’s massive tax reform is expected to be a positive tailwind for corporate profits and personal spending. It is also worth mentioning that the U.S. president has prevented manufacturing jobs from leaving the U.S. and has actually brought jobs back over the past year, adding more strength to the U.S. employment situation. This is important because it provides lower-skilled workers who were displaced by technology (creating structural unemployment) an opportunity to re-enter the labour market.

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