Update on U.S. equity markets

Markets and Investing

 

U.S. equity markets touch new intra-year and closing lows: What’s next?

December 17, 2018

Today, a gauge for U.S. large-cap stocks, the S&P 500, closed at its lowest level for 2018. In addition, the index passed below intraday lows not seen since February 9, 2018. While the index did not close at the day’s lowest levels, indicating some buying toward the end of the trading day, market practitioners had looked at the February levels as potential support for what has been a sluggish market, with the S&P 500 now down 4.8 percent year to date and down 12.7 percent from its September 21 high. The last time the S&P 500 saw these levels was in October 2017. Note that domestic small-cap, mid-cap, international developed and emerging equity indices have also been under pressure, while other asset categories (like high yield bonds, commodities and real estate) have also experienced declines.

As we have shared in prior communications, economic weakness has been a central concern. Our proprietary data suggests that consumer and business trends have softened, and that softness is starting to permeate some of our domestic readings. That said, we are not seeing growth halt. Our readings suggest that economic activity is slowing, albeit from very high levels. We entered 2018 with several tailwinds, including pro-growth fiscal policy, central banks still guiding borrowing costs around historically low levels, and a synchronized global growth trend. Fiscal policy effects have slowed, central banks (most notably the U.S. Federal Reserve (Fed) and most recently the European Central Bank) have begun a tightening regime that could raise interest rates, and as noted earlier, economic growth is slowing.

At the aggregate portfolio level, we are encouraged by a few trends. First, high quality bonds, which had suffered earlier in the year, have delivered positive total returns since domestic equities peaked, especially government bonds. Second, earnings estimates for next year do anticipate a more challenging global backdrop. While those estimates may need to reset a little lower, we are not starting off at overly aspirational levels. Third, while equity market drops of this magnitude are difficult to endure, note that the “drawdown” we are experiencing right now is right around the average intra-year move that markets have experienced over the past 30 years, so we have seen this proverbial movie before. We just haven’t seen it in recent years, which may make enduring this episode more difficult.

Predicting definitive ends to price movements like these is a challenging thing. We continue to retain a balanced outlook for diversified portfolios over the next 12 to 18 months, and our economic readings and corporate health checks do not show material improvements, but also do not anticipate a dramatic deceleration from current levels. We would not be surprised to see some additional volatility in coming weeks, and anticipate the transition from policy tailwinds to potential headwinds to play out through the end of this year and into the first quarter of 2019. Trade negotiations, central bank meetings (including the Fed’s Federal Open Market Committee, which concludes this Wednesday) and economic readings (like employment data and house price releases) will garner attention.

We will continue to update you on our views and please do not hesitate to let us know if we can help address your unique financial situation.

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This information represents the opinion of U.S. Bank Wealth Management. The views are subject to change at any time based on market or other conditions and are current as of the date indicated on the materials. This is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. Any organizations mentioned in this commentary are not affiliated or associated with U.S. Bank in any way.

Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Diversification and asset allocation do not guarantee returns or protect against losses.

Past performance is no guarantee of future results. Indexes shown are unmanaged and are not available for direct investment. The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general.

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