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Stock Market Outlook: Prepare for a Stormy April

The stock market has continued to climb recently, but there are some reasons to think April could bring new challenges for investors.
March 29, 2019
Investing, Investing Data, Investing Strategy, Investments
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There’s that saying about how April showers bring May flowers, but investors are less certain that potential storms in the stock market will deliver something rosy.

Of course, any given month could be turbulent for the U.S. stock market. But investors see reason to be cautious ahead, including: signs the pace of global economic growth is slowing, continued uncertainty about trade negotiations between the U.S. and China, and a reliable U.S. recession indicator that’s flashed a warning sign.

What’s more, investors typically get jittery anytime there’s a strong rally or when the market seems unusually calm. The S&P 500 has jumped almost 20% since late December and is now about 4% below its all-time high. And the S&P 500 went 40-plus days without a decline of at least 1% from late January to March.

» Worried about a market crash? Here’s what to do now

Here’s what investors will watch in April:

An ‘interesting’ month

The Federal Reserve, which was blamed for much of the volatility in late 2018, isn’t a formidable risk for the market in the near term. Policymakers once seemed intent on continuing to raise interest rates. But according to a Fed statement released March 20, the central bank “will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate” ahead.

Clarity about the future trajectory of interest rates is helpful, but investors want similar progress related to trade negotiations between the U.S. and China, along with the status of Brexit, or Britain’s planned exit from the European Union, according to Ronald Sanchez, chief investment officer of Fiduciary Trust Company International.

The deadline for Britain’s exit from the European Union has been delayed until April 12 (from March 29 previously), but investors want resolution about whether the exit will actually happen, Sanchez says. Meanwhile, investors await a much anticipated summit between U.S. President Donald Trump and Chinese President Xi Jinping, along with signs that trade talks are progressing, he adds.

“Those two issues are critical because markets are pricing in the likelihood there’s a favorable dynamic or an announcement,” Sanchez says, adding that any surprises could create additional volatility. “April should be an interesting month for the markets.”

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What to do now: The stock market’s rout in late 2018 “chased a lot of long-term investors out of the market because it felt like it was a recession,” Sanchez says. That’s unfortunate because those investors have missed out on the subsequent rebound, he adds. While investors are likely to face a “much more challenging” environment, with the prospect of lower returns and higher volatility, Sanchez is urging his clients to stay invested in the market. “We may be in the seventh inning, but there also may be extra innings.”

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Risk-reward payoff

Signs of economic weakness — both in the U.S. and abroad — have persisted this year even amid the market’s very strong recovery. That inconsistency could cause volatility. It’s been more than 10 years since the start of the Great Recession and investors are easily rattled by economic data that’s noticeably weaker than expected, as happened with two reports on U.S. and European manufacturing in late March.

We’re getting a little more nervous about the macro data trending lower. But we’re not throwing our arms in the air yet.

Jeff Carbone, managing partner at Cornerstone Wealth Group

Meanwhile, a reliable predictor of past recessions is flashing a warning sign. One measure of the so-called yield curve, which plots the difference between short- and long-term Treasury yields, has inverted for the first time since 2007. This means that short-term rates are higher than long-term rates, which is unusual, and has happened before every recession in the past 60 years, according to research from the Federal Reserve Bank of San Francisco.

That doesn’t mean a recession is around the corner; an inverted yield curve has preceded such an event by as long as two years, Fed research shows. What’s more, stock prices could still increase in the interim, says Jeff Carbone, managing partner at Cornerstone Wealth Group. But given uncertainty about the status of trade negotiations and slower economic growth, the risk-reward trade-off in the market isn’t as attractive now, he adds.

“We’re getting a little more nervous about the macro data trending lower,” Carbone says. “But we’re not throwing our arms in the air yet.”

In April, Carbone will be paying particular attention to U.S. economic reports related to manufacturing and wage growth. Any surprises could rattle the market, he says, adding that he wouldn’t be surprised to see a pullback of about 3% to 5% within the next two months.

What to do now: Now may be an opportunity to sell some winning investments and look for opportunities to rebalance your investment portfolio and reposition for the remainder of the year, Carbone advises. He’s also recommended that clients add some money to defensive sectors — those sectors that do well when the economy slows — including consumer staples (makers of household supplies) and REITs (real estate investment trusts).

» Get up to speed: How to invest in stocks

Stock market forecast

Stock market predictions show that lingering questions, like those highlighted above, are making for more tepid forecasts about what’s ahead:

  • Wall Street strategists forecast the S&P 500 will end the year at 2,950, which would be 4.8% higher than its current level, according to the median forecast of strategists surveyed by CNBC.
  • Much attention focuses on the bulls and the bears, but sentiment among a third camp of investors has held steady in the past two months. The share of investors with a neutral outlook (meaning they believe stock prices will be essentially unchanged in the next six months) has averaged more than 37% since late January, higher than either bullish or bearish readings, according to weekly sentiment surveys conducted by the American Association of Individual Investors.
  • Similarly, CNNMoney’s “Fear and Greed Index” shows a “neutral” reading of 48 as of March 28 on a 0-to-100 point scale. The index, which is based on seven indicators of investor sentiment, pointed to a “greed” reading of 70 one month ago.

Stock market predictions can be interesting to watch, especially as they shift, but they’re less valuable for long-term investors. Irrespective of what happens in the short run, the stock market is a proven long-term bet. For buy-and-hold investors, the S&P 500 has delivered historical average returns of about 10% over a nearly 90-year period.

» How to invest now: Investment strategies for the second quarter

Keep perspective when investing for the long haul, by focusing on the following:

  1. Accept volatility as a given. If you expect that the stock market could swing wildly in the short term, you don’t need to stress about it while it’s happening.
  2. Keep adding money to the market. By regularly investing in the market over time, a strategy known as dollar-cost averaging, you’ll smooth out the price you pay for investments.
  3. Diversify your portfolio to reduce risk. A good mix of different types of assets (stocks, bonds, exchange-traded funds and mutual funds) will reduce your portfolio’s overall risk.
  4. Stay invested. Selling when you think the market’s peaked and buying when you think it’s bottomed — what’s known as timing the market — is risky and difficult to do accurately, even for professionals. Instead, stay the course to avoid unnecessary trading expenses and possible disappointment.

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