Monthly Economic Update October 2018: Volatility Returns Highlighting The Importance Of Diversification


October was distinguished by the return of volatility, as the S&P 500 moved more than 1% in nine out of twenty-two trading sessions. A barrage of economic and geopolitical crosscurrents spooked investors. All told, domestic stocks ended the month down nearly 7%. Hawkish rhetoric from Fed Chief Powell stirred up fears the Fed may raise too aggressively. Uncertainty surrounding the midterm elections and the potential for expanded tariffs on Chinese imports dominated headlines. Sharp losses in large cap tech stocks led to worries that recent market leaders have peaked and are poised for more declines. Half of S&P 500 companies have reported and over 75% announced positive earnings surprises. Market action may be indicating the point has been reached where good news is bad news, meaning strong earnings and economic data may in fact be bad because it could be the impetus for excessive Fed tightening.

In the U.S., large caps outpaced small caps and value outperformed growth. Fixed income declined as rates rose across the curve and credit spreads widened.  International markets fared no better than the U.S.A. Trade tensions and slowing GDP growth weighed heavily on Chinese markets. Other emerging markets, heavily reliant on China, struggled due to the Middle Kingdom’s weakness, a stronger dollar, and idiosyncratic geopolitical issues. European stocks fell on continued traction from populist movements, Italian budget issues, trade protectionism, and Brexit concerns. Despite these headwinds, the ECB stood firm in its plan to end its bond-buying program in December.

Third quarter U.S. GDP was strong at 3.5%, driven by consumer spending and inventories. Slowing housing, weak business spending, and net exports detracted. Inflation has moderated in recent months after reaching nearly 3% in the Summer. Months like October bring to the fore the benefits of diversification and how imperative it is to have a portfolio aligned with one’s risk tolerance.

Economic Data

Market Returns

 

Disclaimers

This commentary was written by Daniel Cohen, CFA, Investment Analyst at Summit Financial, LLC. Sources of Performance: Morningstar.  Indices are unmanaged and cannot be invested into directly. The investment and market data contained in this newsletter is not an offer to sell or purchase any security or commodity. Standard & Poor’s 500 Index (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.  The Wilshire 5000 Index is a market capitalization-weighted index of the market value of all stocks actively traded in the United States.  The index is intended to measure the performance of all U.S. traded public companies having readily available price data.  The MSCI Emerging Markets Index is an index created by Morgan Stanley Capital International (MSCI) that is designed to measure equity market performance in global emerging markets.  Emerging markets are considered risky as they carry additional political, economic, and currency risks.  Real Estate Investment Trusts, REITs, are securities that invest in real estate directly, either through properties or mortgages.  REITs receive special tax considerations and typically offer investors high yields, however, have liquidity constraints.  The Barclays Capital U.S. Aggregate Bond Index is a market capitalization weighted index comprising Treasury securities, Government agency bond, Mortgage-backed bonds, corporate bonds, and some foreign bonds traded in the U.S. Fund Category Performance is not inclusive of possible fund sales or redemption fees.  Investment grade bond analysis included bonds with ratings of AAA, AA, A, and BBB.  Municipal and Corporate Bonds are backed by the claims paying abilities of the issuer.  TIPS are inflation-indexed securities issued by the U.S. Treasury in an effort to widen the selection of government securities available to investors.  Past performance does not guarantee future results.  Information throughout this Newsletter, whether charts, articles, or any other statement or statements regarding market of other financial information, is obtained from sources which we, and our suppliers believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information.  Neither we nor our information providers shall be liable for any errors or inaccuracies, regardless of cause, or the lack of timeliness of, or for any delay or interruption in the transmission thereof to the reader.  Opinions expressed are subject to change without notice and are not intended as investment advice or a guarantee of future performance.  Consult your financial professional before making any investment decision Investment advisory and financial planning services are offered through Summit Financial, LLC., an SEC Registered Investment Adviser (“Summit”).  Securities brokerage offered through Purshe Kaplan Sterling Investments, Member FINRA/SIPC.  Headquartered at 18 Corporate Woods Blvd., Albany, NY 12211 (“PKS”).  PKS and Summit are not affiliated companies.  This material is for your information and guidance and is not intended as legal or tax advice.

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