Linda S. Parenti, CFA
Chief Investment Strategist
Today is the last trading day of what has been a very volatile August. By mid-month the S&P 500 value was down 4.7% but has jaggedly rebounded 3.2% as of yesterday’s close. The daily swings in equity markets have been more extreme this month and continue to be heavily driven by news on U.S. trade developments with China. Although positive news brings great relief, large negative swings in stock indices can be unsettling. This is especially true if you follow the Dow Jones Industrial Average (DJIA) as your preferred market index. The daily moves in this historic index are often quoted in terms of points. At a closing value of 26,362.25 as of yesterday, even a small percentage move may seem sizeable when quoted this way. For example, at its current level, a 2% move up or down for the DJIA equates to 527 points.
Global economic growth has slowed, and unresolved trade issues worsen forward estimates. This has increased talk of recession, even though numerous indicators are not yet pointing in that direction. There is no denying that earnings growth has slowed, but so far remains positive. Companies are resilient and already adjusting supply chains. The consumer is employed, earning wages that are rising faster than inflation and willing to spend. A conclusion to trade conflicts would certainly boost economic growth expectations, corporate earnings estimates and therefore, stock prices. However, any trade agreements with China are likely still a long way off, so I expect continued headline-linked volatility.
Recessions and bear markets always seem obvious in hindsight, but accurately predicting them is rare. Market timing sounds logical, but in practice it is highly risky. It requires two correct decisions. Not just when to sell, but when to buy back. In the meantime, it may be reassuring to know that recessions and bear markets are typically much shorter in duration than expansions and bull markets. It is wise to expect downturns to happen and stick to a plan to manage through them rather than try to time them.
RISKS AND IMPORTANT CONSIDERATIONS
Views and opinions expressed here are for informational and educational purposes only and may change at any time based on market or other conditions or may not come to pass. This material is not a solicitation to buy or sell securities and should not be considered specific legal, investment, or tax advice. The information provided does not consider the objectives, financial situation, or needs of any specific individual. All investments carry a degree of risk and there is no certainty that an investment will provide positive performance over any stated period. Equity investments are subject to company specific and market risks. Equities may decline in response to adverse company news, industry developments, or economic data. Fixed income securities are subject to market, credit, and interest rate risks. As interest rates rise, bond prices may fall. Past performance is no guarantee of future results.