The cost of money is going up. There is no need to dissect the markets any further for the remainder of 2018. It's a game changer in that the entirety of this bull run has been built on the foundation of endless liquidity brought about by nearly free dollars poured into the pockets of investors and corporations.
It wasn't that long ago when we were all talking about the unprecedented nature of a negative interest rate environment. Investors were attempting to explain to each other how getting penalized for holding cash would influence future investment decisions. It was a concrete fact that this would be the environment we would be facing over the next several years. Then something unexpected happened.
The election of Trump is at the beginning stages of setting off a wave of fiscal stimulus measures that serve to amplify the unprecedented global liquidity party taking place this decade. If inflationary pressures weren't a concern during the monetary stimulus phase, then they have now been brought to the forefront of investor's attention now that multiple layers of stimulus exist.
Investors celebrated initially, with a 2017 that saw a near unprecedented bid beneath the markets that led to the possibility of even a 5% decline in the major indices being regarded as an outlier.
Now that the euphoric stage is over, investors are left to mull over the real economic effects of layers of stimulus all being pushed into the economy at the same time. For the first time in literally decades, inflation is set to become the next big economic problem. Investors are just starting to demand a greater return on their government debt instruments to make up for the threat of inflation.
And so we have a problem that the equity markets will take the rest of 2018 to digest. The cost of capital is increasing while investors and corporations have a disease of dependency on cheap capital. The outcome of such a discrepancy is uncertainty that translates into downside volatility until investors can become comfortable with their feelings again.
