Capital market update: Stocks under pressure, but fundamentals remain intact and forward view remains balanced
October 24, 2018
The S&P 500 touched its lowest level since May 2018, erasing the positive gains achieved so far this year, while smaller U.S. companies, as measured by the Russell 2000, reached the lowest levels since the February 2018 sell off. The primary drivers for today’s market sell-off appear to be:
- A few soft earnings results, stoking fears of “peak growth” or “peak margins”
- Weak U.S. housing data, suggesting rising interest rates are starting to take effect
- Signals of slowing global economic growth, such as recent global purchasing manager (PMI) survey results
Treasury yields moved modestly lower as investors looked for less risky investments. Oil prices were virtually unchanged, signaling little increase in geopolitical risk.
Despite price volatility, we still see a solid overall state of global growth, particularly in the United States, and the still positive trend to U.S. earnings growth. While a handful of companies have reported that margins are being impacted by tariffs and rising labor costs, we have not yet seen these effects flow through to the broader market. Inflation remains well contained and the Federal Reserve has remained on a steady and well-telegraphed course of normalizing interest rates.
While disconcerting (the S&P 500 has now closed lower in 19 of the last 23 trading days), we see this “push-pull” scenario for the market as possibly persisting for a bit longer. In our view, solid economic data and better earnings growth are likely to overcome investor concerns and allow the markets to once again scale the “wall of worries.”
We recommend that clients utilize volatility among asset classes to align portfolios with longer-term strategic target allocations. Within stocks, we prefer U.S. stocks relative to foreign stocks, reflecting such things as better economic growth environment, faster earnings growth and a persistent rising trend in the U.S. dollar relative to other currencies.
Within fixed income portfolios, rising interest rates and a narrow difference between shorter- and longer- maturity bonds contribute to our preference for somewhat shorter maturities. We see corporate and high yield bonds as near-fully priced relative to the additional credit or default risks in those securities.
Given recent stock market price action, we remain available to help you avoid experiencing any unnecessary emotional reactions so you can contextualize volatile market movements within your longer- term investment plan. We will update you as important market events and our related views continue to unfold. As always, if we can provide additional perspectives about your unique situation, please do not hesitate to contact us.
Investment products and services are:
NOT A DEPOSIT • NOT FDIC INSURED • MAY LOSE VALUE • NOT BANK GUARANTEED • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
This information represents the opinion of U.S. Bank Wealth Management. The views are subject to change at any time based on market or other conditions and are current as of the date indicated on the materials. This is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness.
Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Diversification and asset allocation do not guarantee returns or protect against losses.
Past performance is no guarantee of future results. The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index and is representative of the U.S. small capitalization securities market.
Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. Investing in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors. Investment in debt securities typically decrease in value when interest rates rise. The risk is usually greater for longer-term debt securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher- rated securities. Investments in high yield bonds offer the potential for high current income and attractive total return, but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer's ability to make principal and interest payments. There are special risks associated with an investment in commodities, including market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors. International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards and other risks associated with future political and economic developments.