This has been quite a turbulent year for stocks! In case you hadn’t noticed, most stock market indexes are down for the year. At the writing of this article, the S&P index, for example, is down 2% since January. Perhaps this is payback for all those years leading up to 2018, when the market seemed like it steadily trended upward (with a few hiccups of course!) since 2009. From the recent market volatility, one would never know that the US economy is still strong, unemployment is at record lows, and that wages are growing at a healthy pace.
But this is a reminder that the stock market is a lead economic indicator and that there are a number of headwinds as our economy enters its tenth year of expansion. The biggest concern at the moment is the escalating trade war between China and the US. Although overtures have been made on both sides, it appears unlikely that this trade dispute will get resolved anytime soon. The impact of rising tariffs are already impacting the growth of the Chinese economy and the world. Although the US is not as trade dependent as most other countries, it nonetheless is negatively impacted by the slowdown in world economic growth.
Another worry for the markets is the effect of rising interest rates on growth, particularly if the Federal Reserve raises short-term rates too quickly. Price data over the past three months suggest that inflation is contained, which has helped lessen–but not eliminate–this concern. Another fear is that a recession is on the near horizon. Economists at JPMorgan Chase put the odds of a recession beginning in the next three month to be around 33%, up from a year ago. JP Morgan economist Jesse Edgerton explains that “on average, expansions haven’t lasted more than a couple years under conditions like these” (e.g. rising interest rates, low unemployment, rising inflation pressures.)
Finally with the bull market in its ninth year, valuations are stretched, and investors are much less forgiving when evaluating company earnings. This is particularly true of the tech companies, which appear to be going through a market revaluation based on more realism and less lofty expectations of their future earnings potential.
All of the factors just discussed will likely continue to influence market behavior in the short term. In other words, hang on to your seat belts and expect more stock market volatility in the coming months! As always, remember it’s the sticking with your financial plan, not the snapshot of your portfolio, which is important in helping you meet your goals. And market downturns have been factored into all retirement projections! Please let Christina or me know if you have any questions or concerns. .