Tough Week for Global Stocks

Last week did nothing to dispel October's reputation as a tough month for the markets. The S&P 500 lost 3.94%, the Dow declined 2.97%, and the NASDAQ dropped 3.78% during what was one of 2018's most volatile weeks so far. All three indexes are down significantly for the month, and both the S&P 500 and Dow have entered negative territory for 2018. International stocks in the MSCI EAFE also struggled, posting a 3.87% drop for the week, and a 13.31% decline for the year. U.S. Aggregate Bonds gained 0.54% for the week but still are negative for the year by almost 2%.

Why did stocks drop? Will they continue to do so?

Currently, many topics are on investors' minds, from inflation to tariffs to valuations and beyond, but analysts are not pointing to one single culprit for last week's performance. Instead, a mixture of concerns, with a large dose of emotion, seemed to drive the markets. It is not possible to know for sure where stocks will go from here, but the markets have now reached extremes in both selling pressure and investor sentiment. In the meantime, diversified portfolios that include asset classes such as bonds have cushioned at least some of the recent negative movement from global stocks.

What did we learn last week?

Trying to find simple explanations for market behavior can feel impossible, in part because the markets aren't a machine - they're a reflection of many human actions. Investors, large and small, all around the world, make choices based on their interpretations of current conditions, and the effects of these decisions become "market performance."

Amidst the volatility, we received several updates on the economy, including:

  • 3rd Quarter Gross Domestic Product (GDP) beat expectations: The initial GDP reading for the 3rd quarter came in at a strong 3.5%, helped in large part by consumer spending.
  • Corporate earnings have been strong, but imperfect: So far, this corporate earnings season is showing 22% growth over the same period last year, but fewer S&P 500 companies are exceeding analysts' predictions than in the 1st quarter of 2018. In particular, some major tech companies' results disappointed investors, even though they experienced substantial growth in revenue and profits.
  • Housing continued to struggle: New home sales were lower than expected in September, which followed disappointing results from existing-home sales data as well.
  • Inflation growth eased: The Personal Consumption Expenditures Price Index, which shows inflation, increased by 1.6% in the 3rd quarter, much lower than projected.

Examined together, this data indicates that while the economy has potential challenges, it also demonstrates solid growth, reasonable inflation, and strong corporate performance. That story feels very different than the sharp drop in stock prices we have experienced in October.

These circumstances provide yet another reminder that while volatility is normal, it also can sometimes seem irrational. In these times it is important to stay focused on economic fundamentals, market technicals, and long-term investment strategies.

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