Investment Insights: What is Driving This Market?
By Cliff Aque, CFA, Investment Strategist
We have talked extensively about the return of volatility over the past year, and the last two months have proven to deliver what seems like a rollercoaster ride. Since the selloff over the first two weeks of October, the S&P 500 Index has bounced between 2,600 and 2,800 three times. As of this writing (December 6, 2018), the index is almost exactly where it was one year ago. So what is driving these swings?
There are no shortage of answers to this question, which is partially to blame for the increased volatility. Uncertainty around interest rates, slowing global growth, and trade policy have been weighing on the markets all year. The last two weeks saw the S&P 500 rise from a low of 2,633 the day after Thanksgiving to a high of 2,790 on Monday as markets participants anticipated a ceasefire to a trade war with China. This was seemingly accomplished at the G20 Summit over the past weekend, but was followed this Tuesday by a tweet by President Trump stating, “I am a Tariff Man.” Then Wednesday, while the markets were closed, Canada announced that they had arrested the CFO of a large Chinese company at the request of the United States over violations of U.S. sanctions on Iran, reigniting trade concerns.
Complicating matters further, a portion of the U.S. Treasury yield curve inverted this week with the 5-Year Treasury yield dipping below that of the 2-Year yield. This caused tension because an inversion of the 10-Year yield to the 2-Year has been a precursor to the last seven recessions, albeit with a lag of six to 24 months. While the gap is historically narrow, as of this writing, the 10-Year yield has not yet inverted. The market will continue to watch for this, but even if it does occur, stock returns have been positive after the last five inversions.
Slowing growth is also high on investors’ list of concerns as growth outside the U.S. slowed throughout the year. However, this global slowdown appears to be moderating and while growth may have peaked in 2018, it remains positive, especially in the U.S. This growth is backed by strong consumers, who are in turn buoyed by a tight labor market. Consumer confidence slipped slightly in November, but this is after hitting an 18-year high at the end of October. U.S. corporations are also fundamentally strong and their valuations appear fair when compared to historical averages. While earnings will likely slow from high levels in the first half of 2018, they are expected to remain positive into 2019.
At the risk of sounding like a broken record, increased volatility is here to stay but for now, fundamentals remain positive. There are plenty of geopolitical issues out there to roil the markets, but ultimately, these too shall pass. As we look into 2019, we continue to see a strong U.S. economy with little risk of recession on the near-term horizon.