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Stock Market Outlook: Choppiness Ahead?

The U.S. stock market has been eerily calm lately, but that could come to a screeching halt in August, historically the most volatile month of the year.
July 31, 2018
Investing, Investing Data, Investing Strategy, Investments
Stock Market Outlook: Choppiness Ahead?
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If the U.S. stock market has felt eerily calm lately, it’s not your imagination. The S&P 500 has gone 25 days without rising or falling at least 1%.

Market choppiness, known as volatility, was practically the norm a few months ago. From February to April, the S&P 500 lurched up or down at least 1% almost half of the trading days. July saw no moves of such magnitude, as the S&P 500 inched progressively higher for a 3.6% gain, the second-best month of returns in almost a year and a half.

But this calmness could come to a screeching halt. August has been the most volatile month of the year and the least active for daily trading volumes, according to Bloomberg data going back two decades. And these elements are linked: With fewer people trading, that increases the likelihood of more exaggerated market moves.

» Volatility can create good buying opportunities: Learn how to begin trading stocks — and how to survive

While the U.S. economy continues to chug along and publicly traded companies are generally reporting better-than-expected quarterly results in the current earnings season, what might be a catalyst for volatility? Politics, according to some investors. Here’s what they’ll be watching in August:

The 2 T’s: Trump and tariffs

Even as President Donald Trump has escalated trade tensions with China, investors have largely brushed off the potential impact on financial markets. But that could change if Trump’s threat of tariffs on all $500 billion of imported goods from China come to fruition.

“That’s where we could see more of an economic impact going forward,” says Mona Mahajan, U.S. investment strategist at Allianz Global Investors. While this threat may be just a negotiating tactic, the risk is China could retaliate — and possibly with tactics beyond tariffs that might upend financial markets, she says.

We could see more of an economic impact going forward.

Mona Mahajan, U.S. investment strategist at Allianz Global Investors

“Trade tensions and tariff issues haven’t proven to be all that impactful to the market yet — and it’s a big ‘yet’ — but we have to watch for that to possibly change,” says Rich Guerrini, president and chief executive officer at PNC Investments. Investors will be watching to see what impact the already-implemented tariffs might have on corporate revenues — and the extent to which this might stall economic growth, though such a scenario wouldn’t play out for at least another year, if at all, he adds.

What to do: Stocks in China have borne the brunt of trade tensions (the Shanghai Composite Index is down 13% year to date), but these stocks will attract long-term investors once tensions lift because economic growth there will likely remain robust, Mahajan says. Closer to home, consider small-cap stocks. The Russell 2000, made up of U.S. small-cap stocks, is outperforming the S&P 500 year to date — 8.8% versus 5.3% — because smaller companies are more isolated from trade issues and benefit from tax reform, she says. “This theme has legs going into the second half of the year.”

The 3 E’s: Economic growth, earnings and elections

Wall Street is in the middle of the multiweek period when companies report quarterly results, while the Federal Reserve bookends August with two meetings. This week, central bankers conclude one of eight regularly scheduled meetings (investors don’t expect an interest rate increase at this meeting), then Fed policymakers will gather at month’s end for an annual economic symposium.

So far, second-quarter earnings have been generally strong, but of more significance to many investors is what company executives forecast for the rest of the year, Guerrini says. “It’s similar to what we’ve seen with Fed meetings — the meeting itself is uneventful but the commentary can be very eventful.”

When it feels uncomfortable, that’s probably the best opportunity to put money in the market.

Rich Guerrini, president and chief executive officer at PNC Investments

As for the Fed, investors will be listening for any possible surprises related to interest rate increases ahead, with policymakers’ forecasts suggesting two more rate increases this year for a total of four. Central bankers are taking advantage of healthy economic growth to steadily raise rates again, Mahajan says. The Fed has increased interest rates seven times since 2015 in the recovery from the economic recession that began in 2009.

» Fed rate hikes: What to do when rates rise

Jerome Powell, chairman of the Federal Reserve, recently said that he believes the U.S. economy is “in a really good place” — it grew the most in nearly four years at a pace of 4.1% in the second quarter compared with the prior quarter. The stock market’s resilience in recent months has been thanks largely to this economic strength, Guerrini says.

But the U.S. midterm elections Nov. 6 could create some short-term market choppiness, Mahajan says, citing analysis she’s conducted of past midterm cycles. Such volatility is likely to be most prominent in September and October amid uncertainty about the fate of control for the House and Senate. Good news: After midterm elections, stocks “tend to perform quite strongly” into the end of the year, she says.

What to do: About 10 years in, the current economic cycle and bull market are “getting a little tired,” Guerrini says. But it’s important to stay invested in the market and now may be a good time to consider how you’re positioned to weather different economic and market cycles ahead, he says. “As we see dips in the market, be willing to take advantage of those dips. When it feels uncomfortable, that’s probably the best opportunity to put money in the market.”

Stock market forecast

While 2018 is shaping up to be more typical in terms of returns than last year, the market has yet to surpass its late-January peak and some investors remain skittish. If you’re among those who’ve lost the bullish feeling for this bull market, consider these tips for staying invested, rather than trying to time swings in the market.

As for the outlook ahead, professionals on Wall Street expect the S&P 500 will end the year above 2,900 — about 5% higher than its current level — according to the average forecast of strategists surveyed by CNBC. Off of Wall Street, 41% of investors expect the stock market will go up in value through at least the end of 2018, though 65% say the worst of market volatility still is ahead, according to the results of a quarterly investor and retirement optimism survey conducted by Wells Fargo and Gallup.

Buying when stock prices are fluctuating can be intimidating, so focus on the facts instead: The stock market has proven to be a fantastic long-term investment, delivering average returns of 10% annually for buy-and-hold investors.

The market undoubtedly will go up and down in the course of your investing timeline. To minimize the risk of a big shock to your portfolio, spread money across a variety of assets and develop a discipline of investing regularly. If the diversification in your portfolio is lacking, consider adding international stocks, bonds or alternative investments, for example.

Finally, long-term investors can be opportunistic. Dollar-cost averaging, which involves regularly adding money to your investments to help smooth out your purchase price, ensures you don’t dump all of your money in when stock prices are at a peak.

» Worried about your ability to stomach volatility? Consider choosing a financial advisor to help keep you on track.

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