Capital Markets Review & Commentary: October 2018

Volatility returned to US stocks in October, providing a reminder of the benefits of diversification at both the asset class and sector level.

Major US indexes flirted with correction territory before rebounding in the final two days. International stocks, which were already having a difficult 2018, neared a 20% decline from January highs.

The cause of market corrections is often difficult to attribute, even in retrospect. We believe two speeches early in the month helped accelerate selling pressure. The first was from Fed Chairman Jerome Powell who said that interest rates are a long way from neutral, and that we may go past neutral. This wasn’t new news, but after a decade of a very accommodating Fed under Bernanke and Yellen, it was a wake-up-call that we are in a new environment for monetary policy. The second was from Vice President Pence who painted an adversarial picture of the relationship between the US and China. The implication is that the trade war will persist or perhaps intensify. We’re cautiously optimistic there will be progress on trade at the G20 meeting later this month, but a quick fix remains unlikely.

Meanwhile, earnings growth continues to be robust and the economy is chugging ahead. Earnings haven’t all been rosy, however, as investor favorites Amazon and Apple offered disappointing guidance, sending tech shares lower. In the US, the sell-off in stocks was sharp and came out of nowhere. That is typically more characteristic of a correction rather than the start of a bear market. Thinking globally, however, stocks have been generally in a flat or downward pattern since the end of January.

It is impossible to know where markets go from here, but recent market activity has served as a reminder that investors should be aware of their allocations and the drivers of risk in their portfolios.

 


The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.
Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

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