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RECENT MARKET VOLATILITY

Insights |

October 12, 2018

 

The volatility that is often associated with the month of October has arrived with the market sell-off over the last two days. Experiencing market declines and increased volatility can be unnerving for any investor. However, if we can take a step back and see the big picture, that the market and economic environment remain positive, it can be easier to weather these challenging periods.

During market ups and downs, it’s important to focus on the fundamentals. And right now, economic and market fundamentals are strong. The U.S. economy is in excellent shape. Consumer spending is growing solidly, consumer and business confidence is high, the job market is quite strong, manufacturing surveys are near record levels, and by historical standards, interest rates are still fairly low.

Interest rates are dominating the headlines right now as a driving force in this current period of market volatility. The positive economic backdrop, however, provides valuable context. When interest rates are rising because of better economic growth, stocks historically do well over time.[1] That appears to be the case now. However, when interest rates spike rapidly, as they have done recently, market volatility increases.

Equity market fundamentals remain solid due to strong earnings growth. Consensus estimates according to FactSet are calling for a third consecutive quarter of 20%-plus growth in earnings for S&P 500 companies, caused by strong economic growth and tax reform. In addition, although uncertainty leading up to midterm elections can make investors uneasy, stocks historically do very well following the midterms once there is clarity from the results.

Trade tensions are another factor capturing investor attention. The US and China have both implemented tariffs with no new negotiations scheduled at this time. The situation remains very fluid as there is a constant news stream documenting the latest back-and-forth between the two sides. Although it looks like the situation is at an impasse, both sides have a lot to lose economically from a trade war.

Even with rising rates, trade tensions, and midterm election concerns, it’s also important to remember that pullbacks (5-10% drops) such as these are normal. Even though stocks tend to average a 7-8% annual gain, there tend to be about three pullbacks and at least one correction of 10% or more each year (data back to 1950). We experienced both earlier this year, in February and April, and we could have more before the end of the year.

As always, we remind everyone to remain realistic with their expectations and prevent emotional or reactionary behavior. We encourage you to stay calm during this latest bout of volatility and focus on your long-term goals and objectives.

 

 

 

[1] LPL Weekly Market Commentary from 09/24/18.

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

All performance referenced is historical and is no guarantee of future results. Indexes are unmanaged and cannot be invested into directly. Economic forecasts set forth may not develop as predicted.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1928 incorporates the performance of predecessor index, the S&P 90.

This research material has been prepared by LPL Financial LLC.