Special Report on Recent Market Volatility

 

Most major indices saw a close to double digit pullback this month which puts global markets’ year to date performances largely in negative territory.

 

What triggered the market correction?

 

There are three main factors that have triggered the market correction:

• Rising interest rate and tighter financial conditions. Higher borrowing cost naturally eat into companies’ profit margins and slow down earnings growth
• Trade worries, most economic principles are based on free trade and it is largely agreed on that free trade stimulate global economy. Market participants are concerned an escalation in trade protectionism will slow down global economic growth
• Earnings, 2018 S&P 500 earnings are on track for 24% growth, however, given the market is forever forward looking, many have concerns that the earnings growth has peaked and will slow down in the years the come

 

The one silver lining is given the recent correction, major market indices have fallen back to their historical average valuations which means stocks are not as expensive as they previously were and this can be a good set up for better returns in the future.

 

Source: Morningstar Zephyr. Price return calculations include dividends and capital gains. Annual returns beginning in calendar year 1970. Rolling 20-year data beginning in 1950. Past performance cannot guarantee future results. Source for Bloomberg Barclays index data: Bloomberg Index Services Ltd. Copyright 2017.

 

 

In times of market volatility, it is our job to remind clients to remain calm and take a long term view to investing. The graph above shows the average 20 year rate of return for S&P 500 is about 10% and there are more up years than down years.

 

In the short term, we believe the market will at least be range bound until after the mid-term elections and we have not seen the bottom yet in the current market correction.

 

 

Historical U.S. Election and Market Performance

Historically, market performance tend to be weak leading up to mid-term election and outperforms in the following year.

 

S&P 500 Returns surrounding Mid-Term Elections (1934 -2014)

For this U.S. Mid-Term Election, the current consensus is for Democrats to control the House and Republicans to control the Senate. In this outcome, it will be difficult for either party to pass new legislations and this is not a bad outcome for investors because the economic impact will be minimum. What the market fears most is a Democrat controlled House and Senate which has the potential to roll back some of the business friendly measures passed early on in the Trump presidency.