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Stock Market Outlook: Washington Likely to Lead the Way

Despite lingering pessimism, 2018 is proving to be a typical year for U.S. stocks. But investors will monitor economic reports and the Federal Reserve for anything unusual come June.
June 1, 2018
Investing, Investing Data, Investing Strategy, Investments
stock market outlook june

Check this out: The U.S. stock market has delivered a year-to-date return that’s not so far off from comparable periods in 2015 and 2016. Sure, it’s no 2017, when the S&P 500 was up nearly 8%, but 2018 is looking like a more typical year so far, clocking in at 1.2%.

That may come as a surprise given the lingering pessimism about U.S. stocks following the 10% rout earlier this year, from which the market has yet to fully recover. The return of volatility also is partly to blame for the pessimism, with moves of more than 1% happening on 33% of trading days, which is higher than the full-year average of about 21% going back to 1958.

Will the arrival of summertime mean that the livin’ (at least on Wall Street) is easier? During the month of June, the S&P 500 has delivered average monthly gains of 0.7%, according to data compiled by Yardeni Research.

From the Federal Reserve to politics to economic reports, Washington will command a lot of the market’s attention in the month ahead. Here’s what professional investors will be watching.

» New to investing in the market? Learn how to invest in stocks

Interest in interest rates

Investors broadly expect the Federal Reserve to raise interest rates by 0.25% when the central bank’s Federal Open Market Committee next convenes on June 12-13. If policymakers do so, that will mark the seventh such increase since the financial crisis.

I don’t think the Fed will do anything to surprise anybody.

Martin Kremenstein, senior managing director and head of retirement products and ETFs at Nuveen Investments

This particular rate hike isn’t necessarily any more or less significant than any of the others, but it confirms that an era of rising interest rates is underway. And investors will tune into the scheduled post-meeting press conference to decipher more about the central bank’s plans for the remainder of the year.

“I don’t think the Fed will do anything to surprise anybody,” says Martin Kremenstein, senior managing director and head of retirement products and ETFs at Boston-based Nuveen Investments. But the Fed’s “slow and steady” trajectory does have an effect on various markets, he says.

“The rising rate thing is a longer-term narrative,” Kremenstein says. “It’s not something you need to do tomorrow or should’ve done yesterday, but you should be mindful of how your portfolio is positioned.”

» Plan ahead: How to protect your 401(k) from rising interest rates

If you haven’t already, it may be time to dust off the less-exciting portion of your portfolio: fixed-income investments, those assets tied to interest rates (like Treasury bonds) or the credit market (like corporate bonds). And specifically, it’s important to consider the duration of such assets — expressed in years — because that, in turn, determines their sensitivity to rising interest rates. (When interest rates increase, the prices of fixed-income securities tend to fall.)

What to do

Kremenstein suggests investors consider where they’re deriving yield in fixed-income investments. Now may be a good time to tilt this part of your portfolio toward credit-related securities that will likely deliver higher yields than those linked to the Treasury market, he says.

Other Washington impacts

The Federal Reserve isn’t the only economic newsmaker in Washington. Investors will be closely watching economic reports and any political news that could affect growth, and by extension, the stock market.

The monthly report on hiring showed U.S. employers added more jobs than expected in May, and the unemployment rate fell to an 18-year low. That follows other reports this week showing consumer spending rose the most in five months in April, outpacing the monthly increase in income.

Why do these reports matter to investors?

“The U.S. economy is basically the consumer,” says Brad McMillan, chief investment officer at Commonwealth Financial Network, based in Waltham, Massachusetts. That’s because consumer spending makes up more than two-thirds of U.S. gross domestic product.

Consumer spending generally depends on how secure people feel in their jobs, and reports on both measures offer potential clues on whether economic growth will accelerate, McMillan says. In turn, the pace of economic growth will help determine both the future trajectory of profit for publicly traded companies and their stock prices.

If you’re upset by where we are right now, you should re-calibrate your expectations.

Brad McMillan, chief investment officer at Commonwealth Financial Network

Beyond the economic reports, the news out of Washington is “all about politics,” specifically trade tariffs that President Donald Trump is pushing to impose on a variety of imports, McMillan says. Looking further ahead on the calendar, another question on the political front is whether Democrats will take control of the U.S. House of Representatives come November, he adds.

What to do

The news has had a way of moving the stock market this year in ways it couldn’t last year, but that doesn’t mean you need to move your positions in response. Thus far, 2018 “actually isn’t a bad year” for the stock market, and the ups and downs, including the 10% correction and volatility, are more typical than the anomaly of 2017’s extraordinary gains, McMillan says. “If you’re upset by where we are right now, you should recalibrate your expectations.”

Stock market forecast

Even if the year-to-date returns for your portfolio are once again positive, it’s been a bumpy road. And that’s made some people question how much longer the current bull market — now the second-longest in history — can persist. But if you’re invested for the long haul, you shouldn’t try to time swings in the market or stress about the events of one day, one week or even one month.

Investors on and off Wall Street are feeling more optimistic.

As for the outlook, investors on and off Wall Street are feeling more optimistic. The percentage of consumers who expect stock prices to increase in the next six months reached a three-month high in late May, according to a weekly sentiment survey by the American Association of Individual Investors. Meanwhile, strategists are forecasting the S&P 500 will end the year more than 9% higher than its current level, according to the average forecast of strategists in a survey conducted by CNBC.

Buying when stock prices are fluctuating can be intimidating, so focus on the facts instead: Stocks have proven to be a fantastic long-term investment.

The market undoubtedly will go up and down in the course of your investing timeline. One way to minimize the risk of a big shock to your portfolio is to spread money across a variety of assets and to invest regularly. If the diversification in your portfolio is lacking, consider beefing up your exposure to international stocks, for example.

Finally, long-term investors can be opportunistic and take advantage of market dips. Dollar-cost averaging, which involves regularly adding money to your investments to help smooth out your purchase price, will keep you from dumping all your money in when stock prices are at a peak.

 

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