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Earlier this week the U.S. stock market suffered its worst pullback since February, declining more than 3%, followed by a partial rebound on Friday. The pullback eliminated nearly all the gains domestic stocks made in the months of September and August.
Market commentators are suggesting a number of reasons for the market decline, including:
- A significant rise in treasury yields, combined with Federal Reserve Chairman Powell’s comment that “we’re a long way from neutral at this point” unnerved investors and sent treasury yields skyrocketing.
- Higher interest rates will depress future earning expectations, which in turn adversely affect valuations, especially tech stocks. Tech stocks are usually classified as growth stocks which means they are valued based on their significant future earnings potential. Some market analysts have also opined that internet companies are expected to disappoint when third quarter earnings are released later this month.
- The International Monetary Fund (“IMF”) lowered its global growth projections from 3.9% to 3.7%, citing the ongoing trade war between the U.S. and China and dim prospects for emerging market countries due to liquidity issues and capital outflows.
- The U.S. stock market has reached record high valuations, and as a result it does not take much to unnerve investors who are concerned that the bull market may be coming to an end.
Only time will tell if the past week was the beginning of a correction or a hiccup to an ongoing bull market. Factors that could determine the direction the stock market takes for the remainder of 2018 and into 2019 include:
- The Fed is still expected to raise interest rates in December and at least two more times in 2019, which could raise bond yields, thereby placing more downward pressure on the equity markets.
- President Trump and Chinese Communist Party General Secretary Xi Jinping are expected to meet at the G20 summit in Argentina in November. If President Trump and Chairman Xi are able to come to an agreement on trade during this meeting markets could be pushed higher.
- Third quarter earnings season has begun, and positive earnings growth of about 19% year over year is expected. Better than expected results should cause the markets to react positively, and vise versa.
Market pullbacks can be a dangerous time for investors who tend to overreact to market pullbacks like the one earlier this week. Maintaining a long-term horizon and following your investment strategy are oftentimes the best ways to ride out market volatility.
THIS WEEK’S ECONOMIC HIGHLIGHTS
- The Producer Price Index (PPI), a measure of inflation, rose 0.2% in September as expected. Core PPI, which excludes the volatile food and energy components, also rose 0.2%, resulting in a year-over-year change of 2.5%.
- The Consumer Price Index (CPI), also a measure of inflation, rose 0.1% in September as compared to the expected 0.2% increase. Core CPI, which excludes the volatile food and energy components, also rose 0.1%. Year-over-year, core CPI rose 2.2% which is slightly above the Federal Reserve’s target of 2.0%.
- Initial unemployment claims jumped by 7,000 to 214,000 for the week ending October 6th, as Hurricane Florence caused an influx of displaced workers. However, continuing unemployment claims increased by a marginal 4,000 to 1.66 million with its 4-week average down 10,000 to 1.65 million.
Please feel free to call us if you would like to discuss what’s happening in the markets and what defensive measures, if any, you should consider.
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