U.S. stocks have hit another trade-induced summer storm.
The S&P 500 Index fell 3% on Monday, its worst day since December 2018. The index is now about 6% from record highs in U.S. stocks’ worst bout of volatility since May.
As shown in the LPL Chart of the Day, Storms Happen Often in U.S. Stocks, stock volatility this year has been relatively subdued compared to history. The S&P 500 has declined an average of 14% from peak to trough since 1990, and even in positive years, the index has dropped an average of 11% during the year.
“Though the volatility has been uncomfortable, it’s normal for U.S. stocks to endure periodic pullbacks,” said LPL Research Chief Investment Strategist John Lynch. “These experiences typically provide opportunities for suitable investors to rebalance, diversify portfolios toward targeted allocations, or to add to equity positions based on what we see as a generally favorable macroeconomic environment.”
Stocks’ recent sell-off has been especially brisk. Just 10 days ago on July 26, the S&P 500 reached a new all-time high, bolstered by Federal Reserve (Fed) rate cut hopes, improving economic data, and cooling trade tensions. Since then, the Fed’s rate cut and messaging wasn’t met with investor enthusiasm, the United States threatened tariffs on $300 billion in Chinese goods, and China pulled prior commitments to purchase U.S. agriculture goods. In addition, China’s central bank let its currency (the yuan) fall below the key 7 per dollar level that some view as a line in the sand relative to currency manipulation.
The fundamental picture for stocks hasn’t really changed, though. Economic growth has exceeded expectations, inflation and interest rates are low, and second quarter earnings have been better than expected. Trade uncertainty continues to weigh on global markets, but tariffs haven’t significantly affected the domestic economy and the Fed has indicated willingness to loosen policy as needed. While there are still geopolitical risks, including trade, a review of all of the above fundamentals suggests to us that the odds of an imminent recession are quite low.
We’ll continue to watch the trade and front monetary policy, along with their impacts to the U.S. dollar, economic output and corporate profit growth. For now, though, we see few reasons that suggest this market pullback will result in anything more than a typical correction, and we maintain our belief that the S&P 500 is fairly valued in the range of 3,000 by year-end.
Please see the Midyear Outlook 2019: FUNDAMENTAL: How to Focus on What Really Matters in the Markets for additional description and disclosure.
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