Stock mar­ket ex­perts say this is a stum­ble, not plunge

Waterloo Region Record - - Business - SARAH SKIDMORE SELL AND ALEX VEIGA

Whoa, what was that?

Af­ter months of rel­a­tive calm, Wall Street has been jolted by a sud­den run of tur­bu­lent trad­ing.

The swoon wiped more than 1,300 points from the Dow Jones In­dus­trial Av­er­age over two days and dragged the bench­mark S&P 500 in­dex down more than 5 per cent. The VIX in­dex, which mea­sures how wor­ried traders are about a de­cline in stocks, climbed Thurs­day to its high­est level since Fe­bru­ary, when the S&P last had a cor­rec­tion, or a 10 per cent drop.

What now?

Ex­perts say this new erup­tion of mar­ket volatil­ity should not be sur­pris­ing, es­pe­cially af­ter the long stretch of rel­a­tive calm in­vestors have en­joyed.

Over the sum­mer, traders set aside wor­ries about the es­ca­lat­ing U.S.-China trade dis­pute and in­stead fo­cused on more en­cour­ag­ing de­vel­op­ments: solid eco­nomic growth and record cor­po­rate earn­ings. It helped that stocks were on the rise — the S&P 500 hit an all-time high just four weeks ago.

So af­ter sev­eral months of gains, a pull­back would be ex­pected, said John Lynch, chief in­vest­ment strate­gist at LPL Re­search.

“Volatil­ity is back and it may re­quire more ac­tive strate­gies on the part of in­vestors to pur­sue their long-term goals,” Lynch said. “Volatil­ity is also not to be feared, but em­braced, as vary­ing data points will cause bouts of mar­ket anx­i­ety. But re­mem­ber that fun­da­men­tals are still strong.”

The econ­omy is in­deed quite strong by many mea­sures — con­sumer spend­ing is grow­ing, unem­ploy­ment is low and man­u­fac­tur­ing sur­veys are near record lev­els. And many ex­perts say that is more im­por­tant than the mar­ket’s daily ups and downs. So what’s be­hind this week’s up­set?

In­vestors have grown con­cerned about a re­cent, steep drop in U.S. gov­ern­ment bond prices and an en­su­ing up­ward move in bond yields, which makes bonds more at­trac­tive rel­a­tive to stocks. The mar­ket is also wor­ried about ris­ing in­ter­est rates, which tend to climb on ex­pec­ta­tions of fu­ture eco­nomic growth and in­fla­tion and can in­crease costs for busi­ness — slow­ing growth and damp­en­ing cor­po­rate prof­its.

“There’s some con­cern that third-quar­ter earn­ings could be maybe a lit­tle bit less ro­bust than they were in the sec­ond quar­ter and there could be more pres­sure on profit mar­gins,” said Wil­lie Del­wiche, in­vest­ment strate­gist at Baird.

Wor­ries about a slow­down in the global econ­omy and the es­ca­lat­ing U.S.-China trade dis­pute also have con­trib­uted to in­vestors’ un­ease. And mar­kets typ­i­cally see in­creased volatil­ity in months pre­ced­ing midterm elec­tions.

“We are not sur­prised by the uptick in volatil­ity to­ward more nor­mal lev­els,” mar­ket strate­gists at Wells Fargo In­vest­ment In­sti­tute wrote in a re­port Thurs­day, adding that “it’s too soon to say that the pull­back is over.”

Hav­ing bonds and eq­ui­ties sell­ing off may feel like the worst of both worlds for in­vest­ment port­fo­lios, but the mar­ket’s shift isn’t as bad as it might seem, said Michael Crook, head of in­sti­tu­tional strat­egy at UBS Global Wealth Man­age­ment.

He notes that the S&P 500 is ba­si­cally back to where it was dur­ing the sum­mer, and only down slightly from its all-time high. In ad­di­tion, the neg­a­tive re­turn in bonds barely reg­is­ters when one con­sid­ers how bonds have per­formed this year.

“That’s very nor­mal volatil­ity, and while it has been acute — like all mar­ket drops — it only erases a few weeks of gains,” Crook said.

The mar­ket’s sta­bil­ity in 2017 may have given in­vestors a false sense of se­cu­rity too, said Na­tion­wide Chief of In­vest­ment Re­search Mark Hackett. The fun­da­men­tal strength of that year re­sulted in his­tor­i­cally low volatil­ity and mar­ket pull­backs. One nat­u­ral re­ac­tion to in­creased volatil­ity is the in­cli­na­tion to get off the wild ride and sell. If you have a lengthy time hori­zon for the in­vest­ment, say a decade, the gen­eral rec­om­men­da­tion is to re­sist that temp­ta­tion. Stocks have his­tor­i­cally of­fered some of the big­gest re­turns over the long term for in­vestors. For in­vestors who want less volatil­ity, bonds, sav­ings ac­counts or other in­vest­ments of­fer less risk. The trade-off is that re­turns over the com­ing decade will likely be lower.


The Dow Jones In­dus­trial Av­er­age jumped over 400 points at Fri­day's open, fol­low­ing two days of steep losses.

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