The last few weeks or so have been a little unsettling for many investors. Bears have come out of hibernation and have sent the broad markets over 10% lower from their recent highs. While no one could have predicted when it would show up or that it would hit with the vengeance that it has, we’ve been expecting increased volatility for several months. Rising interest rates and concern over trade and tariffs appear to be at the root of recent week’s performance and the catalyst for more volatility.
It’s important to remember that, up until recently, market performance has been driven higher by corporate earnings and not speculation. The S&P 500 is now trading at less than 22 times 2018 earnings estimates, down from 24.5 times a year ago *. Corporate balance sheets are stronger than they have been in decades, and we believe the recent tax cut is an unambiguous positive.
The bottom line is that the fundamentals of the markets and the economy continue to show promise. Interest rates don’t typically climb without a stronger economy. Inflation doesn’t usually appear without wage growth. In our opinion, recent selling has been a kneejerk reaction to a rising Ten Year Treasury yield and trade talk; it has been triggered by emotion and not the result of a fundamental breakdown. Another catalyst for volatility has likely been the upcoming mid-term elections. History would indicate that prior to the mid-terms the financial markets experience higher levels of volatility.
For some investors this volatility is simply “noise” and there is no need to make any changes to your investment allocations. For others this volatility may make you uneasy to the point where it would make sense to re-evaluate your current investment allocation. Your risk tolerance may be different than you thought during the bull market.
JOE RANDAZZO, JD CFP®