Three Factors That Matter in Times of Market Uncertainty

Jeffrey Roach (00:04):

Hi, I'm Jeffrey Roach, Chief Economist for LPL Financial, and in this edition of the Econ Market Minute, we'll take a few minutes explaining what factors to track during these periods of uncertainty. First, most geopolitical shocks fade quickly, market drawdowns deepen when spillovers materially raise recession risk, and that's most often through energy prices, supply chain problems, confidence, or tighter financial conditions. Now, geopolitical headlines often generate short-term market noise, but they are not by themselves a reliable guide to whether volatility will persist. Initial market reactions tend to reflect uncertainty and positioning rather than fundamental reassessment of the economic outlook. In this time, it may be no different. The key is to look past headline driven turbulence and assess whether shocks are beginning to influence core economic fundamentals. Whether volatility becomes lasting is ultimately an economic question. Second, global financial conditions for guidance. Credit spreads and funding conditions are highly valuable for tracking stress in the banking system and for assessing any damage from those geopolitical risks.

Jeffrey Roach (01:18):

If you notice in the chart, the Russian invasion in Ukraine was not the catalyst that really increased stress in credit markets. It was the spike in inflation and the hike in the Fed funds rate. That really was the catalyst. Guidance comes from these daily updates from the Office of Financial Research and Independent Bureau reporting to the Department of Treasury. And for now, U.S. conditions remain below average stress levels, but we are seeing rising risks in bank funding. Third, track dollar performance for clues. The recent appreciation of the U.S. dollar against most currencies reflects investors' assessment that the U.S. economy offers a uniquely strong combination of relative growth, resilience, high returns, and financial system credibility. Compared with other advanced economies, the United States continues to exhibit firmer growth and at the same time, global uncertainty is reinforced, demand for deep and liquid dollar denominated assets, which remain a key source of safe and scalable collateral.

Jeffrey Roach (02:18):

As capital flows towards the U.S. for both return and safety and away from lower growth, lower yield, or policy constrained economies, the dollar strengthens, broadly signaling that global investors continue to rank the U.S. as a relatively safe haven. Here's some concluding thoughts. A spike in geopolitical risk often foreshadows lower investment in stock prices and employment. When funding costs or credit availability change, economic effects follow, but for now, the risks to growth are to the downside as credit conditions tighten, but not as great as the risk to growth in international markets. That's all for now. If you want more insights on global market trends, follow us on social media and take care.