While U.S. stocks were only marginally lower to end the week, they took a rocky path to get there. U.S. large-cap stocks fell by nearly 2%, posting their largest declines since September 2016, on Wednesday as investors became increasingly concerned that turnover and turmoil within the Trump administration will prevent implementation of some (or all) of its pro-growth policies. However, stocks stabilized on Thursday and rallied on Friday. After months of low stock market volatility despite higher uncertainty about economic policies, investors shouldn't be surprised by the return to a more volatile market. We think larger day-to-day price changes could continue, even if stocks trend higher as we expect. That's why it's important to own an appropriate mix of stocks and bonds for your goals and risk tolerance so you can stay invested during times of higher market volatility, and stay on track toward your financial goals.
If anyone needed a reminder of just how much the market has spoiled investors of late, look no further than last week. Stocks dropped 1.8% on Wednesday – the largest daily decline in 175 trading days – in response to increasing turmoil in Washington. The S&P 500 is up 35.9% over the past three years, and Wednesday's selloff left the U.S. market a whopping 1.9% off of the all-time high (reached on May 15), perspective that seemed to be lost in the headline reaction.
One headline referred to "…bracing for a massive stock-market selloff," and the term "Trump Slump" emerged. It appeared as if some were willing to pronounce the rally's time of death after one day of weakness. As is always the case, a wider lens is useful. U.S. equities gained a combined 1.0% on Thursday and Friday, reflecting a more balanced tone. So where do we go from here? We think last week offers the following:
We expect policy risks, including the unfolding turmoil in Washington, global regime conflicts, political unrest (as seen recently in areas such as Brazil and Venezuela), progressing Brexit negotiations, and central bank actions to hog more of the spotlight moving forward, with the market perhaps less willing to look past these disruptions than has been the case so far this year. We think additional volatility will take the form of temporary pullbacks within the broader trend higher, but last week's reaction signals to us that after a period in which we haven't seen a 5% decline in nearly 11 months and only two 10% corrections in the past six years, market dips are likely to evoke more emotional reactions.
Sources: 1. CBOE VIX Index 2. Bloomberg, total return of MSCI EAFE index and MSCI Emerging Markets index.
|Dow Jones Industrial Average||20,805
|S&P 500 Index||2,382
|10-yr Treasury Yield||2.24%||-0.09%||-0.21%|
We expect investors to shift their focus to macroeconomic data as the earnings season comes to a close over the next couple of weeks. Next week, preliminary PMI data will be released on Tuesday, the Federal Reserve's May meeting minutes will be reported on Wednesday, and the consumer sentiment data will come on Friday.
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