So far this morning, stocks continue their selloff and though technology stocks have led the decline, as of now, the technology laden NASDAQ Index is showing signs of recovering. Yesterday, the S&P 500 lost more than 3% while the NASDAQ lost over 4%. Although stocks have moved dramatically higher during the last 9½ years, this slump is reminiscent of the nearly 10% decline in stocks this February.
Pundits are blaming the drop on fear of trade wars and inflation. However, it should be noted that since the threat of trade wars surfaced, the market has risen 9%. And as far as inflation goes, while it has modestly ticked up, there is no evidence that prices are on a dramatic rise. It is natural for us to look for order in chaos, but I find it interesting, that what is being blamed for the downturn, was also around during the run-up.
Since the Fed began tightening, we have been concerned that they could raise rates too quickly. It takes time for the economy to adjust to higher interest rates and quick increases by the Fed could reduce economic output more than desired. Last week’s selloff in bonds and the subsequent rise in yields has highlighted this risk. Since tightening began in 2015, the Fed has raised rates seven times and is expected to hike rates again in December.
While interest rates are still well below historic norms, borrowing costs for individuals and corporations has increased. However, the boost from fiscal stimulus should be sufficient to keep the economy moving forward for now and corporate earnings growth remains strong.
As we have warned in the past, the dramatic rise in stock prices and the complacency in the market, creates an environment susceptible to volatility spikes. This is what we are experiencing now.
I can’t tell you where the market will go from here, and no one can. But from history, we can see that after quick market sell-offs, the market usually bounces back. For better or for worse, the market does not move straight up and declines are part of a well-functioning market.
While market timing is a hopeless endeavor, these spikes give investors a chance to reevaluate their long-term goals and confirm that their portfolios are invested to meet their long-term needs with the appropriate amount of risk.
Washington Trust Bank believes that the information used in this study was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.
Washington Trust Bank.