Equity markets seem to be struggling with “known unknowns”—that is to say we know there are some things we do not know—ending a volatile stretch of almost daily ups and downs for the market, creating a “risk on-risk off” tennis match for investors.
Here are a few of the questions that the market seems to be grappling with:
Known: Chinese import growth is slowing versus export growth
Unknown: Is this slowdown a sign of greater issues in Chinese growth leading to softer demand for outside goods and commodities? Or, is it indicative of high inventory levels in the country and demand will return?
Known: Commodity prices are softening
Unknown: Is price softening a result of slowing demand in China and other emerging markets, or a slow leak in a commodity price bubble?
Known: U.S. Dollar is rebounding
Unknown: Is it better for U.S. manufacturers to enjoy the benefits of exporting goods with a weaker dollar or for U.S. consumers to experience greater purchasing power with a stronger dollar?
Known: Consumers are feeling the pinch of higher energy and food prices with the April Consumer Price Index (CPI) rising 3.2 percent, the most since October 2008.
Unknown: Does this increase translate into broad long-term inflation across sectors or will consumers adjust to the new environment with little relative pain?
Time will sort out these unknowns and determine market leadership going forward. These unknowns must be factored in to the risk analysis for investors.
