As apprehension about a potential U.S. recession reached new heights, international markets experienced a sharp sell-off on Monday, January 21. The following day, the Fed moved decisively and unexpectedly slashed the federal funds target rate by 75 basis points to 3.5 percent. The U.S. markets fell sharply early in the day but regained considerable traction with the Dow Jones Industrial Average closing down just over 1 percent.
We recognize investors may be very concerned about this volatility—what it means for the global economy, the markets and their Calamos portfolios. Above all, it is important to remember that volatility—even significant volatility—is a normal part of the markets.
At Calamos, we are taking the events of recent days in stride, and the views we published earlier this month in our Market Review and Outlook commentary remain largely unchanged. The markets have sped up the corrective process and are pushing for some solutions to occur quickly. As demonstrated by the unscheduled rate cut, the markets got the Fed's attention and the Fed responded.
Our Perspective on the Recent Volatility
- The Fed rate cut provides some relief to the banking and credit markets.
- We believe bank capital will be rebuilt quickly and the credit insurance industry should be funded in short order. The markets are testing the capital support for the credit markets.
- The international markets appear to be responding to the "unsatisfactory" fiscal stimulus package out of Washington. The de-coupling of global markets looks to be in question as the correction was global.
- U.S. markets look to have weathered the storm well compared to the hit non-U.S. markets endured Monday. At this point, the meaning of this mixed message remains uncertain.
- In our view, slower GDP growth is likely (see our Market Review and Outlook for more extensive discussion), but the financial markets have discounted a recession already. Corporate profits are likely to deteriorate, but again, the markets appear to have adjusted for this potentiality.
- We believe the global drivers of wealth creation that have been in place for the past decade are still firmly intact. The growing acceptance of democracy has propelled the globalization of trade, capital and information, and we expect these powerful forces to continue. Second, the technology revolution has reached all corners of the globe, and should continue to provide a tailwind to innovation, prosperity and a better quality of life. Unless we see policies that target or attempt to dismantle these global secular trends, any correction should be relatively mild and viewed as short term in nature.
- A strong U.S. dollar policy needs to be established—this country will not prosper by devaluing its currency. Instead, we need to compete with better knowledge, and more creativity and productivity.
We encourage investors to remain focused on the long term, both on their long-term goals and on the long-term factors that have fuelled the growth of the global economy thus far. Having invested through extremely turbulent periods in the past, we remain confident in our long-term perspective and in our time-tested discipline. As always, we look forward to using our proprietary research to capitalize upon the opportunities that we believe are inherent in volatility.