Is the U.S. market rally fading? Following the U.S. Presidential Election on November 8, the American stock market was on a tear – until March when the rally started to tone down somewhat. Some of the tepidity could be attributed to uncertainty arising from global politics, cross-border tensions and the timeline/success of the implementation of the U.S. government’s policy overhauls. And, there was no dearth of ‘negative headlines’ on such matters in recent weeks.

U.S. tensions with Syria and North Korea keep aggravating by the day.  Following the Syrian government’s chemical weapons attack, U.S. President Donald Trump ordered, Thursday late afternoon, airstrikes on an airfield in Western Syria where the chemical attack had originated. Recently, North Korean state media threatened a nuclear attack on the U.S. if needed, following the U.S. Navy’s advancements towards the western Pacific – a move which Trump described as an “armada,” aimed to rein in the nuclear capabilities of North Korea.

On the economic policy front, debates and uncertainty surrounding Donald Trump’s tax cut proposals are probably adding to investor apprehension.

As Investors Seek “Safety,” Equities Surge in Volatility

Last week started with sharp spikes in stock volatility. The CBOE VIX (index measuring market expectation of 30-day volatility of S&P 500 index options) moved past 15 on Tuesday the 11th – for the first time since election. The “fear gauge” reached 15.07, climbing more than +7% from the previous day. This follows Monday’s +9% increase.

“Shocks” or uncertainties usually drive investors to retreat to their supposed “safe” assets, and it’s no different this time. Around 6.4 billion shares were traded on U.S. stock exchanges on April 11, less than the 6.7 billion average daily volume of last 20 trading days, according to Thomson Reuters data.

Additionally, on Tuesday, the 10-year U.S. treasury yield fell to 2.32 – its lowest level since February 24. The S&P 500, on the other hand, declined -0.14% the same day. While, the U.S. dollar declined to a five-month low against the “safe haven” currency Japanese yen.

Can Shocks Defeat the Bull?

Negative headlines may have a role in turning stock markets dour compared to the first quarter’s momentum (the S&P 500 climbed more than +5.5% through the first 3 months of the year), but the cooling-off since March – around -1.8% in S&P 500 – is far from being earth-shattering and definitely not bad enough to portend an end to the bull.

“Shock” events, including geopolitical tensions, may have the potential to wreak havoc on market sentiments, but only momentarily. As suggested by CFRA analyst Sam Stovall, since World War II, a negative shock during a bull market would cause the S&P 500 to fall an average -2.4% on the day of the shock, and -4.5% overall before bottoming out within just nine calendar days. On average, the index breaks even in 18 days. (As reported by CNBC).

Moreover, even as news of the U.S. airstrike on the Syrian airbase was followed by the S&P 500 dropping -1% almost overnight; the index eventually ended just -0.08% lower for the day on Friday.

Unless strong enough to spell economic slowdowns/recessions, shocks can hardly win over fundamentals in determining long-term market prospects.

It seems that recent days’ tepidity in the markets reflects nothing more than a “wait-and-see” mode that investors are finding comfort in, amid uncertainty surrounding geopolitical events and policies.  Also, with the corporate earnings season underway, investors are probably holding off on investments until more companies bring forth results for the latest quarter, helping investors gain clarity on where to invest.

Bottom Line for Investors

Recent “shocks” – including heightened geopolitical tensions involving the U.S. and uncertainty regarding implementation of the new government’s policy proposals – may have tempered the market confidence a bit. But more importantly, it is the absence of any new solidly positive narrative that’s presently keeping markets from regaining their steam.

Nevertheless, what ultimately underpins markets’ long-term potential is fundamentals – instead of getting overwhelmed by short-term volatility, investors should stay focused on long-term fundamentals while making investment decisions. But, we do realize the challenges faced by investors in making effective decisions amid too many ‘negative headlines.’ But, the right investment strategy can help you stay focused on the fundamentals. Learn about Zacks top investment strategies with our guide, “Dean’s List of Investment Strategies.” Click on the link below to download your free copy:

 

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