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Stocks erased their gains for the year this week (Oct. 25) as investors reacted sharply to a small number of high-profile companies that reported lower-than-expected earnings. In addition, there are ongoing worries about slower global growth and the impact of higher interest rates. Although big daily moves (up and down) may seem unsettling, this month's pullback has put the S&P 500 down slightly less than 10% from its recent high – a return to normal market volatility following many months of tranquility. As frequently happens, bond prices rose as stock prices fell, reinforcing the stabilizing value of owning an appropriate mix of stocks and bonds based on your comfort with risk and long-term financial goals.
Despite a few negative headlines, corporate earnings are strong, up about 20% from last year. And while we think continued earnings growth can help markets stabilize and support a rebound in stock prices, higher volatility is likely to continue. Some details can provide a better perspective:
Market volatility over the past few weeks has brought emotions back into the market. Sizable daily fluctuations can be unsettling, but pullbacks are far less worrisome when put in the context of broader market performance. The outlook is more balanced in the later parts of the market cycle, but fundamentals are still sufficiently healthy to support this bull market. Don't be surprised by further swings in the stock market, and if appropriate, consider the opportunities created by short-term pullbacks.
Craig Fehr, CFA
Kate Warne, Ph.D., CFA
Past performance of the markets is not a guarantee of what will happen in the future.
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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