With steep declines in the market this week, nerves are high as many investors wonder what this volatility means. Could this mean a bear market is around the corner? Read on to get our view on what’s to come.
Navigating Market Volatility – volatility has returned to the markets, following nearly two years of virtually uninterrupted gains. Zacks Investment Management hopes that the wild market have not caught too many of our readers off-guard, since we have written extensively about our view that it was only a matter of time before the ‘mean reverted’ to higher levels of volatility. We have regularly warned readers of the possibility – even probability – of a full-on stock market correction. As of this week, the S&P 500 officially dipped into correction territory, having declined over 10% from the peak, and the dramatic and steep declines have alarmed many investors. Last week, the S&P 500 and the Dow capped their biggest weekly declines since 2016. Our view of the current market volatility: try to ignore it and stay cool. Market volatility can be a normal, even healthy feature of equity investing, and in our view the economic fundamentals that formed our positive outlook for 2018 remain in place. The reasons given for the volatility vary: inflation worries, global central bank tightening, wages rising too fast, computer-generated trading, etc. These concerns, to us, seem like the same old recycled fears we have been aware of for some time now. We do not think they have much fundamental impact. Quite the contrary in fact – when we see swings and sudden declines in the market accompanied by what seems to be a bit of media hysteria about widely-known economic fears, we tend to label those as classic signs of a market correction – not the start of a bear market. Even if the market declines should continue from here – which they could – we would encourage investors to stay the course.
Meanwhile, Corporate Earnings Reporting Strong – As of last week, about 50% of S&P 500 companies had reported earnings for the fourth quarter of 2017. A high-level synopsis is that Corporate America is looking strong. For Q4 2017, 75% of S&P 500 companies have reported positive earnings-per-share (EPS) surprises and 80% have reported positive sales surprises. If 80% is the final number for the quarter, it will mark the highest percentage increase in at least a decade. Earnings surprises usually matter – it indicates that corporations are healthier than the market expected, an outcome that should generally be rewarded by higher stock prices. As for actual Q4 earnings, the blended earnings growth rate for the S&P 500 is 13.4% so far, with all eleven sectors reporting earnings growth for the quarter, led by the Energy sector. On a valuation front, the S&P 500 is still slightly dear with a forward 12-month P/E ratio of 18.0x, as compared to the 5-year average of 16x. Recall, however, that valuations reached some 25x at the height of the tech bubble, so there is a historical precedent for higher valuations from here.
Europe Appears to Continue to Chug Along – by measure of research firm IHS Markit’s gauge of business activity, the eurozone continues to break new barriers. The composite purchasing managers index rose to 58.8 in January, closing-in on a 12-year high in January. If the surge in manufacturing and services is repeated in February and March, Europe could be headed for quarterly growth of 1%, which would mark a solid premium over the region’s long-term trajectory.
Canadian Rhetoric on NAFTA Heats Up – Canadian Prime Minister, Justin Trudeau, joined the tough rhetoric party this week by delivering some tough words on the future of the free trade agreement with the U.S. and Mexico. Prime Minister Trudeau indicated that Canada would “walk away from NAFTA if the U.S. proposes a bad deal,” adding that Canada “will not be pushed around.” Negotiations continue.
While the market saw nerve-racking declines this week, we do not foresee this volatility turning into a bear market in the near future. Still, that does not mean investors should not prepare for one. There is always a new bear market lurking around the corner ready to maul when investors least expect it.
Instead of fearing a bear market, we would like to try to help prepare investors for the next one by offering a free Portfolio Stress Test. This test will simulate how your portfolio would potentially perform during a bear market, and help to address other important investment concerns like if you have the correct asset allocation or underperforming funds. Learn more by clicking on the link below?