Edward Jones Anticipates Higher Market Volatility Will Persist

November 01, 2018

Strategist shares latest outlook and strategies for managing market volatility

St. Louis, Mo. – Financial services firm Edward Jones today reported that the volatility markets experienced in October is likely to continue. Daily moves that have dropped U.S. stocks roughly 10 percent from their recent record highs indicate a correction, which Edward Jones says is a return to normal volatility. As investors work to make sense of changing indicators, earnings reports and major economic news, recent volatility doesn’t mean the end of a bull market, but rather signals a later part of the economic and market cycle.

Edward Jones’ Investment Strategist Kate Warne, breaks down the drivers of recent volatility, and actions for long-term investors to weather the instability.

Behind the volatility: Four components of a changing market outlook

  1. The pace of economic growth is expected to slow from about 3 percent in 2018 to near 2.5 percent in 2019 as the effects of the tax cuts and higher government spending fade. While higher tariffs may also hamper growth, the pace remains above the average rate during this long expansion. Solid job growth and strong consumer spending also make a recession less likely.
  2. Company earnings are up more than 20 percent in 2018 due to the effects of the corporate tax cut and better economic growth. Keeping an eye on 2019, earnings should continue to grow by 8 to 9 percent, albeit at a slower pace than 2018, but still strong enough to help support rising stock prices.
  3. Concerns over rising interest rates initiated recent volatility, and it’s likely rates will continue to rise slowly as long as economic growth is solid and inflation remains near the Federal Reserve’s 2 percent expected target. However, investors are watching closely for any signs of change, which might persuade the Fed to either pause or increase rates more rapidly.
  4. Slower than anticipated global economic growth and a rising dollar have international stocks lagging and emerging markets falling more than 20 percent. While these same concerns persist for the U.S., recent slowdowns have often been followed by better growth, which is expected in this case.

Three tips to help long-term investors weather the volatility

  1. Keep realistic expectations for how your investments are likely to perform over time. Remember your portfolio is designed based on your risk tolerance, time horizon and financial goals. It generally doesn’t match the market, so your portfolio doesn’t rise or fall as much as the S&P 500.
  2. Check your asset allocation and rebalance as necessary. Ensure you have the right mix of stocks and bonds for your situation. For example, bond returns lagged stocks for the first three quarters of 2018. Bond prices tend to fall when stock prices rise, ultimately lowering overall portfolio returns. However, bonds helped steady portfolio values in October. If higher market volatility made you uncomfortable, you may need to add fixed income.
  3. Consider adding international equity investments. In some cases, international stocks could have higher dividend yields and more attractive valuations.

Increased market volatility is normal, but it can be uncomfortable. As part of your long-term investment strategy, holding an appropriate mix of investments, focusing on the positive fundamentals and maintaining realistic expectations can create a sense of calm and financial confidence, during market volatility.

Important Information:

*Before investing in bonds, you should understand the risks involved, including credit risk and market risk. Bond investments are also subject to interest rate risk such that when interest rates rise the prices of bonds can decrease, and the investor can lose principal value if the investment is sold prior to maturity. 

**Investing in equities involves risks. The value of your shares will fluctuate and you may lose principal. Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.

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