Why To Expect More Volatility Ahead

technical bounceWhile stocks rebounded last week, Russ explains why the good times may not last for long.

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Ewelina-Banaszak / iStock / Thinkstock

Stocks rebounded last week, with the U.S. market taking the lead. However, investors should be aware that the good times may not last for long.

As I write in my new weekly commentary, “Troubling Signs on the Horizon,” there are at least two signs pointing to higher volatility ahead for stocks.

Slowing global growth

Estimates for 2015 growth by the G8 countries have fallen from more than 2 percent last fall to barely 1.7 percent today, according to Bloomberg data. Meanwhile, recent U.S. economic news has been mixed. Second-quarter gross domestic product rebounded from the first quarter’s slowdown, which was not as bad as initially recorded.

That said, overall growth over the past several years was weaker than previously thought.

From 2011 through 2014, the U.S. economy grew at an annual rate of 2 percent, well below the previously estimated 2.3 percent.

In addition, there was another notable headwind for growth in last week’s economic news: Slower growth implies that productivity was a bit lower than the already anemic level that earlier reports suggested. This may have significant implications for the U.S. economy.

To the extent productivity doesn’t pick up, this, coupled with an aging-related deceleration in the labor force, suggests a much slower norm for U.S. growth than the post-WWII average.

Indeed, this possibility was reflected in the recent downgrade of U.S. growth estimates by Federal Reserve (Fed) staffers.

Less benign credit conditions

With global growth estimates coming down and commodities continuing to trade lower, it should come as no surprise that bond yields are once again falling.

Investors are reacting to signs of slowing global growth, plunging commodity prices and more modest inflation expectations.

In addition, last week’s Employment Cost Index (ECI) number, the weakest since 1982, called into question expectations of a September Fed rate hike.

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