Markets Are Broken and Nothing Is Working

For investors, 2018 is poised to go down in the record books ... but not in a good way. With less than three months left in the year, global benchmarks for stocks, bonds, commodities and currencies are all down. It's rare for all four to be down in a year, and it has only happened once before — in 2015 — in data going back to 2004. It would be easy to write off the poor performance as an anomaly that will soon correct until you realize that the factors weighing on global markets aren't likely to go away anytime soon.

The most obvious culprit is the Federal Reserve. The central bank is on track to raise interest rates four times this year, and seems intent on boosting them at least three more times in 2019, according to Bloomberg News's Wes Goodman, who pointed out the poor performance of global financial assets. Those rate increases are having a ripple effect, most notably on short-term bonds and emerging-market assets. But the Fed isn't the only culprit. Other major central banks are joining the Fed in lifting rates from crisis-era lows or are looking for any excuse to do so. They are also starting to withdraw liquidity in other ways. The collective balance-sheet assets of the Fed, European Central Bank, Bank of Japan and Bank of England, which grew steadily to 37.2 percent of their countries’ total GDP at the end of 2017 from less than 20 percent in 2011, have shrunk to 36.6 percent this year, data compiled by Bloomberg show. If the trend holds, 2018 would mark the first such decrease since 2006. And just like you can't put all the blame on the Fed, you also can't pin all the blame the central bank community. Political worries — from Brexit jitters in the U.K. to turbulence in Italy, Turkey and Brazil — as well as trade-war concerns are also playing the villain. The Paris-based Organization for Economic Cooperation and Development said in late August that during the second quarter, international trade in merchandise by the world’s biggest economies contracted for the first time since 2016 against a backdrop of a stronger dollar and rising protectionism.