There's been a lot of volatility in the markets of late, a reflection of the general confusion about what direction the economy is headed. One minute, the markets seem to reflect unbridled optimism. A day later, everyone is running for the hills. The simple question is, why?
The simple answer is probably that the markets are as confused as we are right now. There are two competing camps, each of which sees the world very differently, and each of which is acting and reacting in contradictory ways. Most simplistically, the two camps can be divided into optimists and pessimists.
In the optimists' corner, you have the people who believe the US economy is benefitting from a full-on economic expansion. Low energy prices and tame inflation are encouraging the US consumer to spend more, and allowing the Fed to resist the urge to increase rates, something they generally do when the economy starts to show signs of strong growth. The optimists believe that we're in a "goldilocks economy," not too hot and not too cold, that will foster continued job creation and prosperity without triggering a party-killing interest rate hike by the Fed.
But, over in the pessimists' corner, you have the people who say the dramatic decline in the price of oil, which has fallen by more than 50% since the middle of 2014, is actually a harbinger of something much worse. Energy prices could never have fallen so far so fast, the theory goes, if something bad wasn't around the corner. So, what's around the corner? For starters, a sick Europe and a renewed threat of a "Grexit." The Eurozone has been lagging the US in its economic recovery for years, and things seem to be getting worse, not better. Add to that the new regime in Greece which might finally make good on its threat to pull Greece out of the Euro. Such a move could create additional strains on the Eurozone and even a crisis of confidence in the world's second most important currency.
Then there was the "Swiss surprise." For about three years, the Swiss National Bank had been purchasing Euros to maintain a ratio of about 1.2 Swiss Francs to one Euro. But suddenly, in the wee hours of the morning on January 15, the Swiss decided to drop its interventionist policy, resulting in an immediate 20% increase in the value of the Swiss Franc relative to the Euro. This might have been great for Swiss vacationers in France or Italy whose purchasing power suddenly increased, but it was anything but for Swiss exporters whose products are sold mostly to other Europeans, and whose costs were suddenly 20% higher in Euro terms. The Swiss government apparently felt they had no choice as the value of the Euro kept declining, and was about to decline further as a result of the Quantitative Easing that the European Central Bank was ready to implement. Clearly, the Swiss felt it was better to feel some pain now than a lot of pain later.
So, the real question is, how long can the US economy keep doing well if the rest of the world is stagnant or worse? We're a big country and a huge market, and we can sell a lot of stuff to ourselves without having to rely as much on exports as, say, Norway or Chile. But no country lives in a vacuum, not even the United States. In this globalized world, Greece and Switzerland loom much larger than they might have done not that long ago.
Given the competing views of our near-term economic future, we're just going to have to get used to more volatility in the markets and the rollercoaster swings we've seen lately. My own bet is that the US can continue to prosper, even with the problems abroad. But a Grexit could be a game-changer and a shock to the global economy that could pull the US down with it. We can't really know until and unless it happens. That's what keeps things interesting, if also a bit nerve-wracking. So, proceed cautiously but don't panic. The US is not Greece, and that light at the end of the tunnel is probably not an on-coming train… or at least that's what the optimists would tell you.
RPBG Director & Writer/Editor