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The Weekly Economic & Market Recap    

August 10, 2018  

Financial markets have been remarkably resilient throughout the bull market run. In only a handful of notable periods have an investor’s confidence and resolve been tested. The “taper tantrum” which resulted from the Fed’s decision to gradually reduce the size of quantitative easing in 2013 was one such example. As we approach the mid-term elections, it would not be unusual for market volatility to increase. There is typically an identifiable catalyst that creates some uncertainty in the markets that precipitates a market drawdown. As we examine the horizon for potential investment risks, the most obvious concerns are a policy mistake by a major central bank or a full-blown trade war. The spark that causes a correction, however, is often less obvious (e.g. a currency crisis in a small emerging market economy). This week the equity markets sold off on Friday due to the dramatic plunge of the Turkish Lira. Turkey depends heavily on borrowing from foreign sources to fund growth, so its economy can be damaged by capital flight creditors lose confidence. Additionally, Turkey does not have the necessary reserves to pay foreigners back. Turkey’s economy has overheated, with inflation running at an astonishingly high 16%. The market’s risk appetite can be damaged for a time by the deepening problem of an emerging economy like Turkey. In our view, Turkey is unlikely to lead to a systemic economic issue, but it is worth paying attention to.

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