Market Outlook: 2nd Quarter

By Kate Warne April 18, 2018

Nearly two years of calm markets ended earlier this year when global stocks fell more than 10%, and they’ve continued to bounce up and down. Concerns have centered on:

  • The impact of higher tariffs
  • A possible trade war with China
  • The outlook for technology stocks
  • The potential for higher inflation

Edward Jones expects markets to stay choppy, as changing economic policies generate winds of uncertainty and ripples in the markets. But keep in mind that this type of market volatility is normal – in fact, we typically experience three to four 5% drops, known as dips, and one 10% drop, known as a correction, on average each year.

Don’t let the return of higher volatility push your financial strategy off course. Our outlook for stocks is positive due to improving global economic growth, the impact of the U.S. tax cuts and still-low interest rates. Better economic growth and expectations for strong earnings growth in the U.S. and internationally are providing ongoing support for rising stock prices in 2018.

The U.S. economy is accelerating slightly, helped by lower tax rates, rebounding business investment, optimistic consumers and higher federal government spending. And corporate America may be on track for double-digit earnings growth due to faster-rising sales growth and corporate tax cuts. 

Interest rates and inflation 

As long as inflation remains close to 2% as we expect, the Fed can remain patient and stick to its current plan of quarterly rate hikes. That should also mean modestly higher long-term interest rates, which is still a favorable environment for U.S. investment-grade bonds. However, we don’t think the long-term outlook is as favorable for high-yield bonds or international fixed-income investments. Consider reducing your allocation to these investments. Although both have higher rates, we don’t think they’re high enough to compensate for the higher risks.

Tariffs and potential trade restrictions

If additional tariffs and trade restrictions are actually imposed, they could trim the outlook. Higher tariffs typically mean consumers pay higher prices for those products, reducing how much they purchase, and potentially slowing economic growth. Despite escalating tariff proposals by both the U.S. and China, we think negotiations should limit their effects, and that’s why we haven’t changed our positive fundamental outlook. But the impacts could be much broader, especially if higher tariffs are imposed on more products and countries. Tariff announcements themselves have been disruptive and increase uncertainty, which could reduce overall growth if they continue to escalate. So far, though, we think the effects of improving economic and earnings growth should be far stronger for both U.S. and international equity investments.

The global economy is improving, with almost every country in the world reporting better growth now than a year ago. Developed-market earnings are generally expected to grow faster than in those in the U.S., and their stock valuations aren’t as high, making them attractive investments in our view.  We recommend adding international equity investments if appropriate.

Action for investors

After two years of low market volatility, this year’s bigger moves may seem unsettling, but it’s just a return to normal volatility. Stay calm and remember that when the Dow moves up or down 250 points, that’s about a 1% change. If recent pullbacks have made you uncomfortable, talk to your financial advisor about whether you should rebalance your portfolio to include more bonds, giving you the right mix of stocks and bonds based on your comfort with volatility and long-term financial goals. Also, we recommend reducing any individual stock position to no more than 5% of your equity portfolio.

There are many possible triggers for more short-term market volatility, but the timing isn’t easy to predict. We think a better strategy is to stay prepared for higher volatility to continue. And don’t forget that you can take advantage of pullbacks when they occur, known as “buying the dips.” When the fundamentals are positive, pullbacks can be an opportunity to buy stocks at lower prices.

Important Information:

This information is for educational and illustrative purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation.

Investors should understand the risks involved of owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates, and investors can lose some or all of their principal.

Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.

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