Trade tensions have flared up again, and they’ve caught the stock market off guard.
The S&P 500 Index has dropped 2.1% over the past two days amid a slew of trade-related headlines. On May 6, the United States announced it would implement additional tariffs on Chinese imports at the end of the week if no trade agreement is reached. In response, China threatened its own retaliatory measures. China and U.S. officials are still scheduled to continue trade talks in Washington, D.C. May 9, but the threat of escalation looms large in investors’ minds.
Recent market volatility has been uncomfortable, but not particularly surprising given the lack of turbulence year to date. As shown in the LPL Chart of the Day, the S&P 500’s largest pullback this year has been unusually small relative to previous years. Since 1970, the S&P 500 has made it through the first five months of the year without at least a 2.5% pullback only once—in 1995.
On average, the S&P 500 has endured an 8.5% pullback from January to May each year. This year, stocks haven’t come close to that. The largest S&P 500 pullback this year has been a one-day slide of 2.48%.
“Given the recent run we’ve had, we believe conditions are ripe for an increase in volatility,” said LPL Research Chief Investment Strategist John Lynch. “Though we remain optimistic about U.S. stocks’ longer-term prospects, stocks recently reached overbought levels.”
While volatility could take over in the near term, we see the resurgence in trade risk as a temporary obstacle to new S&P 500 highs later this year. In our view, current trade headwinds will have a negligible impact on economic growth, and the U.S. economy has emerged relatively unscathed from what is traditionally the weakest quarter of the year. Economic fundamentals also point to higher prices: The labor market is steadily improving, corporate profits are at all-time highs, and inflation is healthy.
In the meanwhile, we look for S&P 500 support in the 2,775 range, the index’s 200-day moving average. If this level were to be reached, it would represent a 6% slide from record levels, and at the low range of a typical 6-10% market correction. Solid fundamentals and technical support may provide investors with potential for relief from the recent bout of market volatility.
For more of our thoughts on U.S. stocks, check out our latest Weekly Market Commentary: Sell in May?
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.
The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
This research material has been prepared by LPL Financial LLC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.
The investment products sold through LPL Financial are not insured deposits and are not FDIC/NCUA insured. These products are not Bank/Credit Union obligations and are not endorsed, recommended or guaranteed by any Bank/Credit Union or any government agency. The value of the investment may fluctuate, the return on the investment is not guaranteed, and loss of principal is possible.
For Public Use | Tracking # 1-850902 (Exp. 05/20)