This Choppier Environment Isn't a New Normal—It's the Normal Normal

By Victor Zhang - August 8, 2018

We all go through hectic stretches of being overscheduled. Eventually life calms down and we're grateful for the return to normal. The market's extended period of relative calm after the Great Recession had the opposite effect on active managers. We are paid to manage risk and sift through a large universe of investment options to identify what should be a limited number of compelling opportunities. So, the market's relatively smooth and broad-based advance was anything but normal for us.

The environment is changing in 2018. After holding interest rates at historically low levels since the financial crisis, the U.S. Federal Reserve (Fed) began raising rates in late 2015 and is now well down the path to normalization. Inflation also is creeping back into the lexicon after an extended absence. When you add political turmoil, higher energy prices and a potential trade war to the mix, you get volatility. This choppier environment isn't a new normal—it's the normal normal.

When the market is volatile, the tendency of stocks to move together declines. There's also a wider spread between the top- and bottom-performing securities. The risk of negative returns is higher, but we believe these conditions create more opportunities to add value through security selection and building portfolios that offer return potential commensurate with the risks we're taking.

In this quarter's Investment Outlook, our chief investment officers discuss the opportunities and risks their teams are encountering in this more normal environment. Our global fixed income team believes that yields on 10-year Treasuries are closing in on their peaks for the next few months and expects continued policy divergence between the Fed and central banks in Europe and Japan.

With rates rising, our global equity managers are finding opportunities in select financials and limiting exposure to companies that were key beneficiaries of low rates. Higher oil prices and production efficiencies will likely benefit exporting countries and segments of the energy sector but hurt importers and pressure companies that can't pass along higher energy costs to customers.

Finally, the impact of U.S. tax cuts is beginning to surface in corporate earnings. Some companies are benefiting more than others, but we're watching all of them to see how they spend their tax savings.

While we believe this environment is conducive to active management, caution is warranted. We encourage you to understand your risk exposure, and ensure it's aligned with your long-term investment objectives.

Victor Zhang
Victor Zhang

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    This Choppier Environment Isn't a New Normal—It's the Normal Normal

    Interest rates, inflation, political turmoil, higher energy prices and a potential trade war are making for a choppy environment in 2018.

      Generally, as interest rates rise, bond prices fall. The opposite is true when interest rates decline.

      Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

      The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.