Are you feeling inundated with news these days? Especially what seems to be noise and confusion about politics, the economy and the market? If so, you’re not alone: According to a recent Nielsen Company report, the average American spends 10 hours and 39 minutes a day consuming media.* News about possible policy changes has been boosting the stock market, reinforced by positive economic and earnings results. But higher uncertainty may mean more volatility lies ahead.
Despite the current political headlines, American consumers are feeling better and spending more. In December, consumer confidence reached its highest level in 15 years, according to the Conference Board. Retail sales were up 5.6% over the past year, a better-than-expected gain. Small-business optimism has soared. Combined with continued solid job growth, these are good indications for further improvements ahead, since consumer spending accounts for more than two-thirds of overall U.S. economic growth.
Moreover, a synchronized global rebound may have begun. In addition to better U.S. economic indicators, Europe is showing signs of healthier growth, building on improvements that started in 2016. Japan’s economy has expanded for four quarters in a row. And the Organisation for Economic Co-operation and Development projects an increase in the pace of global economic growth to 3.3% in 2017, ending a two-year slowdown.
The pickup in global growth seems to be muffled by worries about increased protectionism, European elections and the eventual British exit from the European Union (Brexit). The expectation of rapid policy changes in the U.S. has also led to a spike in economic policy uncertainty, as the chart below shows.
The Trump administration has offered an array of significant policy changes and has started to act quickly, proposing immigration restrictions, suspension or elimination of some regulations, and consideration of a border adjustment tax with other proposed tax changes. A host of other policy changes is expected to follow. While the process could continue to be messy, rising optimism has been a boon to U.S. stocks.
Less attention has been paid to the accompanying increases in interest rates and the value of the U.S. dollar, though. And historically, rising market volatility has accompanied higher economic policy uncertainty. That’s why we think investors need to prepare for the possibility that markets could experience some hiccups along the way.
We think many potential policy changes can improve the outlook for economic and earnings growth – and thus are good news for rising stock prices over time. But higher policy uncertainty is likely to trigger volatility along the way. How can you address rising market noise and uncertainty? Consider three actions:
Market sentiment can change quickly, catching investors by surprise. Taking these actions can enhance your understanding of the role each investment plays in your portfolio, helping you stay invested when volatility returns.
*“Americans devote more than 10 hours a day to screen time, and growing,” cnn.com, July 29, 2016.
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