Investment Insights: Volatility rears its head again

Wade Balliet
Posted by Wade Balliet
Investment Strategy

This weekly report presents insights from our Global Investment Management team.

Colorful Riyadh skyline at dusk.Doubt returned to financial markets today as investors grappled over the question of whether one of the longest bull markets in history still has room to run.

The S&P 500 opened this morning over a percent lower than yesterday, sliding 2.34% before paring losses. Energy led declines while defensives beat the broader market. The gauge touched its lowest level in over four months. Global political tensions, including Saudi Arabia’s deepening diplomatic situation, Italy’s credit worthiness, Brexit negotiations, and a strained relationship between the U.S. and both Russia and China, continue to weigh on stock prices. That negative sentiment appears to be strong enough to even overshadow the stellar earnings results reported so far this season.

Despite a few cracks in the earnings machine, reports are coming in fairly close to expectations. A large number of S&P companies are scheduled to state their results in the coming week or two. So far, over a hundred companies have scored earnings that beat estimates by an average of over 4%, which is comparable to the past few years of quarterly outperformance based on Bloomberg data. The real highlight so far continues to be earnings growth, which is currently over 20% – one of the best results on record. Even with such a rosy overall picture, a few mainstays such as Caterpillar and 3M have reported a worsening outlook based on rising costs.

Political concerns in Europe and the Middle East may be the key reasons for that spreading doubt. Brexit is closing in on its March 2019 deadline, and the withdrawal agreement may actually be close to complete. However, the current language in the compromise has met sharp criticism from British officials. Parliament may be attempting to garner a no-confidence vote to oust current Prime Minister Theresa May. Italy was able to stave off a bombshell in recent days, as the Moody’s Investors Service cut its rating of government debt, but left it just above junk status, which may calm the rise in yields. The most recent and growing concern, however, has been the global reaction following the death of a journalist within the Saudi consulate in Turkey. Saudi Arabia has been condemned by a growing list of governments around the world for its apparent involvement. Companies are also adding pressure by pulling out of the Future Investment Initiative, a Saudi conference, and withdrawing from existing deals.

The recent flight to quality has pushed Treasury prices higher, while oil prices and stocks have sunk lower. While the S&P has dropped almost 7% from its all-time high in late-September, it’s important to remember that these smaller declines can be healthy for the market in terms of resetting valuations and reminding investors that volatility is still alive and, occasionally, kicking. Similar moves happened in the first few months of 2018 and over the past several years, which have only been speed bumps in the impressive climb for U.S. stocks. Uncertainty, and therefore volatility, will likely remain over the medium term. But our team believes fundamentals remain supportive, and the near-term outlook remains favorable.

Chart showing various market returns as of 10/23/18


Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. The information in this newsletter is for informational purposes only and is not intended to be investment advice or a recommendation. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.

Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.

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