Weekly Market Update (November 13, 2017 - November 17, 2017)

By Craig Fehr November 17, 2017

Stocks were lower for the second week in a row as equity markets saw moderate moves both up and down midweek. Wednesday's market decline and Thursday's subsequent rally gave investors a taste of volatility, but the Dow Jones Industrial Average has not experienced a 1% intraday drop over the past 66 trading days, a record streak. While progress was made on a new tax plan, investors are still focused on the differences between the respective U.S. House of Representatives and Senate plans and the difficulties associated with reconciling them. Although changes in government policies can have a sizable effect on investment returns, the timing and impact are harder to predict than you might think. Therefore, we think it’s better to follow time-tested investment principles and avoid letting politics influence your long-term strategy.

The Return of Volatility... Sort Of

Remember market volatility? It's been a while. Long enough, in fact, that you might not have recognized it, but that crooked line in the stock market chart last week was indeed volatility.  The S&P 500 dropped 0.7% midweek, with the Dow shedding 168 points in two days as markets reacted negatively to falling oil prices and worries surrounding the progress of tax reform.  Optimism returned on Thursday to the tune of a nearly 200-point gain, followed by a 100-point drop to end the week.

All told, the Dow fell 0.3% on the week, a dip that hardly registers as a material move. However, it's noteworthy insofar as we haven't seen anything that resembles normal volatility for some time. The S&P 500 moved by more than 0.50% on two separate days last week, the first time that's happened since July.  The market has risen in 10 of the last 13 weeks and hasn't posted a monthly loss since October 2016.  Looking ahead to 2018, we think stock market swings are likely to be more frequent and more material than we've experienced over the past year. Consider the following:

  • Markets have been calm…really calm – It's been 508 days since the last 5% sell-off, and the last 10% correction was almost two years ago. The VIX index, which measures market volatility, has been well below average for the past year, including recently reaching the lowest reading in the history of the index.  Investors aren't complaining, particularly since this year's tranquility has been accompanied by a nearly 20% year-to-date return.  But low volatility can have a drawback. It can foster complacency that can cause overreactions when market gyrations emerge.  We think volatility will return to more of the norm than the exception as we advance in 2018, and investors with appropriate expectations will be better positioned to react – and not overreact – when this occurs.
  • The list of potential volatility instigators isn't shrinking – We think spurts of volatility will become more frequent, and the potential for a market correction – which would be just the third since 2011 - has risen. We think the list of possible catalysts includes a policy misstep from the Fed as it looks to continue raising rates, disappointments or disruptions in the outlook for tax reform, a downturn in the Chinese economy, or an escalation in the conflict with North Korea.
  • There's a difference between volatility and a bear market – Some volatility is good, and some is more worrisome. When markets pull back in response to short-term disruptions or worrisome headlines (likely from the list above), these can be compelling buying opportunities when the broader underpinnings of the bull market remain intact.  Currently, these underpinnings include a growing economy, rising corporate earnings, and still relatively low interest rates.  With these conditions in place, pullbacks – while potentially more prolonged than we've seen over the past few years – are likely to be temporary amid an ongoing bull market.
  • Preparation pays off – Volatility is inevitable, and jumping in and out of the market to avoid it is not a sound strategy, in our view.  Investors don't have to be at the complete mercy of market volatility.  To prepare, consider the following:
    • Reset your expectations for risk and return. U.S. large-cap stocks have delivered an average annual return of 15.8% over the past five years. We think equities will provide a positive but more moderate gain moving forward. And we think the path to those gains will be choppier. Having a strategy in place in advance of a market pullback will put you in a better position to capitalize on it.
    • Proactively rebalance your mix of equity and fixed income. If the rally in stocks has made them a larger-than-intended portion of your portfolio, consider rebalancing back to your target mix. This can help reduce your sensitivity to fluctuations in stock prices. In early 2016, the U.S. stock market fell 12%, but bonds rose by 2.3% during that period, meaning appropriately balanced portfolios performed much better.

The Stock & Bond Market

Index Close Week YTD
Dow Jones Industrial Average 23,358 -0.3% 18.2%
S&P 500 Index 2,579 -0.1% 15.2%
NASDAQ 6,783 0.5% 26.0%
MSCI EAFE* 1,986 -0.8% 17.9%
10-yr Treasury Yield 2.34% -0.06% -0.10%
Oil ($/bbl) $56.62 -0.2% 5.4%
Bonds** $109.31 0.3% 3.3%

Source: Bloomberg. *5-day performance ending Thursday; **Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results.

The week ahead

In a holiday-shortened week, existing home sales will be reported on Tuesday, and the Federal Reserve will release the minutes from its meeting earlier this month on Wednesday.

Important Information

The Weekly Market Update is published every Friday.

Edward Jones does not provide access to past weekly summaries.

The Dow Jones Indexes are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use.
All content of the Dow Jones Indexes © 2017 is proprietary to Dow Jones & Company, Inc.

Past performance does not guarantee future results.

Diversification does not guarantee a profit or protect against loss.

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.

This information is approved for use with the public.
It is intended for informational purposes only.
It is believed to be reliable, but its accuracy and completeness are not guaranteed.

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