After peaking at over 26,000 as measured by the DJIA in January, US equity markets have experienced the return of volatility in a big way thus far this year.  However, the volatility we have seen really falls within normal and healthy ranges of a typical market consolidation, especially on the heels of such an extraordinarily strong move up in 2017.  In fact, 3 months ago there was some concern about valuations becoming excessive.  But with the consolidation we have seen, coupled with a strong underlying US economy and strong corporate earnings, a market that was pressing towards 22x 2018 forward earnings is now trading at a much more comfortable 17x 2018 forward earnings.  If the market continues to trade sideways as we expect, and earnings continue to surprise on the upside, we are expecting the forward PE multiple to fall even further in the next few months.


Certainly, the day-to-day barrage of headlines out of Washington DC is contributing to the volatility.  However, the markets do seem to be acting more and more desensitized in the past month or so to the inordinate number of tweets and ordinarily jaw-dropping headlines we have seen out of Washington.  Ordinarily, these types of political and/or geopolitical events, while somewhat nerve-racking in the extremely short term, do not usually carry much weight in determining stock prices, economic policy, the business cycle, and interest rates in the intermediate term.  We do believe the market reaction to these news headlines will continue normalize and become less impactful on short-term market swings in the coming months.


Our opinion is that the much more influential factor weighing on stock prices since February is the move higher in longer term interest rates (see the chart below of the yield on the US 10 Year Treasury Note since 1994 for reference). 

It is important to remember that interest rates have been inordinately and abnormally low for nearly a decade because of the extraordinary policies that the Federal Reserve and the US Treasury implemented in response to the 2008-2009 financial crisis.  Essentially, we are finally witnessing the unwinding of that “easy money” era and, in my opinion, reasserting a normal interest rate curve. 


This unwinding and normalization of interest rates and monetary policy is a very good thing for several reasons;


  1. Fixed Income investments are finally starting to generate income for investors.  For the last 10 years, with interest rates stuck at or near zero, many investors dependent on deriving income from their investments were forced to assume more risk than they were comfortable with by moving into more risky and/or illiquid assets (stocks, real estate, commodities, etc.) to generate yield.  We were no exception in this respect and we continue to look for higher yielding and lower risk alternatives for our clients in this category now that interest rates are normalizing.
  2. Remove the moral hazard associated with low interest rates.  When there is no cost associated with making an investment, investors will pursue marginally more unsustainable investment opportunities.  Although regulators have done a good job of discouraging banks from originating loans to fund these types of investments, particularly owing to the Dodd Frank regulations that came out of the financial crisis, regulators can’t (nor should they) prevent investors from pursuing unleveraged investments based upon unsustainably low interest rate assumptions.  As interest rates move higher, investors are naturally forced to consider more normalized, and therefore more sustainable, interest rates in their cost assumptions.  This will naturally create a much more sustainable investment climate.
  3. A huge uncertainty is being addressed.  At the time (2009), the only real option to address the severity of the financial crisis was the extraordinary policies that were put in place; specifically, ZIRP (zero interest rate policy) and Quantitative Easing (which took on an alphabet soup of acronyms – TARP, PDCF, TALF, TSLF, and so on).  Because of the virtually unlimited balance sheet of the Federal Reserve, the only risk of these policy’s failure was whether we had the political will to follow through with it.  However, there has been another concern that nobody could have answered at the time.  That being, how would the Federal Reserve ever unwind that much capital and were we just pushing an inevitable crisis down the road.  As the economy has expanded rather remarkably the past 10 years, the final normalization process of raising longer term interest rates (the yield on the 10-year US Treasury) is starting to look pretty painless.  To the extent that the 10-year yield can move up toward 3 ½% or so while the economy continues to strengthen, and equity markets just move sideways for a few months, we will have achieved a rather remarkable feat.  That being to normalize the interest rate structure and return the Federal Reserve to its much more traditional role of just pushing short term interest rates around to maximize employment and minimize inflation.


Our sense is that it will take a while yet for longer term interest rates to fully normalize in that 3 ½% to 4.0% range.  The actual range that interest rates settle at will depend on about a million factors, but most notably inflation, unemployment, and growth.  To the extent these 3 components can settle in at the targets that have been set by the Fed and the President’s economic council (specifically 2.0% inflation, 3.0% GDP growth, 4.0% unemployment), we expect the business cycle to continue a very sustainable path for several years.


As always, please feel free to contact us if you have any questions or if you need to schedule an appointment to discuss your account or financial plan with us.  This is particularly important if you have experienced a big change in your life recently (got married, retired, changed employment, bought/sold a business, etc.).


2017 Form ADV Notice and Offering – the firm’s 2017 amended Form ADV Part 1 & Part 2 filings with the Securities Exchange Commission was filed timely 03/08/2017.  If you would like a copy of this important disclosure document, please contact us at (303) 442-3670 or and we will be happy to deliver it to you at no charge.


Privacy Notice – the firm’s privacy notice, which details how we handle and/or may share your private information within the firm and with certain partner firms in servicing your account, is included in the 2017 Form ADV Notice.  Please refer to that document to review our Privacy Policy.  If you would like a copy of this document, please contact us at (303) 442-3670 or and we will be happy to deliver it to you at no charge.




Mark P. Culver

Managing Partner

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Culver Investment Company, LLC

360 Interlocken Blvd

Suite 104

Broomfield, CO 80021



(303) 442-3670



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Investment advisory and financial planning services offered through Culver Investment Company, LLC, a Registered Investment Adviser registered with the US Securities Exchange Commission.   

Securities offered through ValMark Securities, Inc. Member FINRA, SIPC.
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Culver Investment Company, LLC, Culver Retirement Services, Inc. and Culver Insurance Services, LLC are separate entities from ValMark Securities, Inc.



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