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comments on market volatility

UPDATED: February 8, 2018

At American Beacon Advisors, we partner with those we believe to be world-class investment managers and have the opportunity to hear from these experts who specialize in their respective asset classes. In our ongoing quarterly due diligence meetings, which have been taking place in recent days, we discussed the recent pickup in volatility seen in global markets. In summary, here is what we’ve heard:

  • The spike in volatility and swing in short-term market momentum was possibly sparked by a pickup in inflation expectations on the back of strong wage growth numbers reported in January (2.9% year-over-year), potentially causing the Fed to tighten (raise interest rates) faster than previously anticipated. Potentially exacerbating some of these sharp moves are systematic trend-following strategies that use algorithmic trading, which can add fuel to the fire when positions are unwound. Also causing investor worries are the possible implications of central bank policies shifting from accommodative policies of low interest rates and quantitative easing to a monetary tightening environment.
  • We believe the market is simply correcting after a strong period of returns, which is normal and healthy. Despite the large drop in the DJ Industrial Average on Monday (down 1175 points), the DJIA is cumulatively up 29.2% from the start of 2017 through yesterday (February 7, 2018). We believe trying to time the market is a losing approach and suggest that investors consider owning diversified portfolios that can withstand these inevitable bouts of volatility. In volatile markets dislocations are created, which provide opportunities for active managers to exploit.
  • Underlying corporate fundamentals appear strong and high-yield default rates remain well below long-term averages. Despite the recent pullback in equity markets, the global economy remains firmly in a synchronized growth upswing, which we believe should be positive longer-term.

    Source: www.bls.gov/news.release/empsit.nr0.htm

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