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What's driving stock market volatility?


Capital market update: Levels of focus

October 26, 2018

In prior situational analyses, we have shared our views on what appears to be driving current capital market volatility. Some of these drivers include recent signs of slowing global economic growth, a few weak earnings reports from companies in key sectors, geopolitical tensions and worries that central banks — particularly the U.S. Federal Reserve — will transition to a less growth-friendly orientation when setting future policy. We have also highlighted that despite these recent challenges, the overarching trend for economic fundamentals remains generally positive. Economies are still growing, but the growth trajectory has been more uneven than during recent quarters when global growth was more “synchronized.” Companies are still delivering solid sales and profit growth, but investors are concerned that we may transition into a tougher environment for those trends to continue.

Our investment research team uses a three-lens approach when assessing asset classes and capital market dynamics: fundamentals, investor sentiment and technicals (price patterns). We see a mixed-to- still-positive environment for fundamentals, and with the recent declines in assets (the S&P 500 index, which measures the U.S. stock market, has closed lower 20 of the last 25 trading sessions), investor sentiment has turned decidedly more negative but is still within reasonable historical levels. In terms of price patterns, we want to include a few key levels that we and investors are focused on. While the fundamental and sentiment news flow is likely to remain dynamic, sharing these price levels will hopefully provide you with some insights on where investors’ attention may be anchored.

The S&P 500 stock index provides a broad proxy for the U.S. stock market and is widely followed by investors. We will use this index to reference the following relevant price levels. As of today’s close (October 26), the index is currently 9.3 percent below the high closing price of the year, which was slightly below 2,931 on September 20. The all-time intraday high of 2,940 was set the following day and we consider that mark to be a positive indicator of a more robust market.

The market is still well above intraday lows experienced during the heightened market volatility from earlier this year. For example, today’s closing price of 2,658 is still 4 percent higher than the intraday low on April 2 when the S&P 500 reached 2,553, and 5 percent above the intraday low price of the year, which was 2,532 set on February 9. While those lows represented price support during previous times of investor fear, a price move below those levels could lead market sentiment to shift further into negative territory.

We continue to lean on our constructive fundamental view of the markets, which supports our balanced view on market risks between stocks and bonds. The market is currently plagued by the push and pull of negative investor sentiment and still positive overall earnings growth. An improvement in earnings news flow, trade tensions, economic data or some certainty from midterm elections could be catalysts to provide more clarity on future market direction. We will continue to update you on our thoughts, but in the meantime, please do not hesitate to let us know if we can answer anything specific to your unique situation.

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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.

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. 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.


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