Investment Insights

Investment Insights: Recent Volatility

23 October 2018

By Cliff Aque, CFA, Investment Strategist

The pullback in the U.S. stock market during the first few weeks of October is reminiscent of what happened this past January into February, only slightly less dramatic in terms of the correction. In both instances, the market experienced strong returns during the three months leading up to the peak, while interest rates rose considerably over the preceding month. The rise in real interest rates was even more pronounced during that preceding month, meaning higher inflation was expected. In both cases, the market took a step back, declining for ten trading days in the first instance, and assuming October 15, 2018 was the latest trough, nine days in October.

Volatility is here to stay, as evidenced by the market’s strong rebound on October 16th and subsequent pullback on October 18th, but it is important to remember that pullbacks in the stock market are normal. This most recent one has a number of contributing factors beyond rising rates and inflation concerns, such as divergent stock market returns, slowing growth outside of the U.S., and political concerns. 

The U.S. stock market and economy had decoupled from the rest of the world in 2018 with strong market performance and a growing economy. Prior to October 10, 2018, U.S. equities were up 8%, while the international MSCI EAFE Index was down 7%, and the MSCI Emerging Markets Index down 14%. The rest of the world, while still growing, has seen growth slow this year and the outlook has been muddied by tensions in the European Union (e.g., disagreements with populist Italy and Brexit negotiations), and continued trade tensions between the U.S. and China.

Mid-term elections loom in the U.S. with a contentious political environment, but history suggests that these concerns should not affect the market regardless of the outcome. Historically markets have corrected during the year leading up to the election and rebounded after the election. If third quarter earnings are strong, as we expect them to be, the stock market should benefit and continue to rise over the next six months barring any geopolitical or U.S. political shocks.