2017 was a year in which markets were seemingly able to focus on the positives of a US economy that seemed business and investment friendly - reduced regulation, tax cuts and and interest rate environment that promised continued gradual moves by a Federal Reserve with new leadership in the face of continued steady growth.
2018 has so far seen not much change in that core narrative: the economy continues to grow steadily and the Fed remains on track with its long stated programme of gradual rate increases in line with that. The Trump tax cuts have injected a bit of extra fuel to the corporate sector, such that we're now looking at earnings growth this year of 16% or so, with this being evident in the soon to be released Q1 earnings numbers.
If all that is steady as she goes, why then have markets been notable since February for a big jump in volatility?
Trade policy, announced on Twitter.
Whether or not this is a reflection of a real change of strategic tack away from free trade to one which is much more unilateral is still to be seen: one school of thought suggests that this is merely a negotiating tactic and that once some sort of publicity friendly "win" has been secured, we'll all go back to something approaching normality.
At present, the response to the Trump administration's trade belligerence has been measured and proportionate - especially on the part of China. Any damage done so far has been relatively modest and mostly confined to hurt feelings since the threatened tariffs have yet to be implemented since they are subject to a period of review and negotiation.
We assume that some sort of reason and logic will prevail, but as Trump's main leadership characteristic seems to be the embrace of government by chaos, there is always the possibility that this will not happen.
If so, then the effect on market sentiment will go from the existing one of day to day volatility, but with an underlying strength based on a healthy global economy, to one which marks move to a more "risk off" mentality, as investors gauge the effect of globally more restrictive trade. If that happens, then the risk averse investment approach could stay in place for an extended period.
The next month will give an indication of likely direction.
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