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Market Update

Anthony Saglimbene, Ameriprise Global Market Strategist
As of 2/21/2018

Looking back

  • For the first time in two years, the stock market experienced a correction of more than 10%, which included two record-setting drops of over 1,000 points in a single day
  • Stronger wage gains in January sparked concerns of rising interest rates and inflation in February
  • These concerns have contributed to a spike in volatility, causing stock prices to see more ups and downs over recent weeks

Up ahead

  • While markets have been turbulent, economic and corporate conditions point to a positive backdrop for stocks this year
  • Stock prices may resume their climb higher — since March 2009, the S&P 500 has declined 10% or more nine times but then rebounded to higher levels
  • Nevertheless, investors should expect more turbulence ahead

Data Source: FactSet

Market Update: Are markets headed for more volatility?

Stock market corrections are normal and healthy in the long run

Investors received a wake-up call this month. Sanguine and complacent market conditions over the last 12-18 months finally broke, jarring asset prices from their seemingly unending upward trajectory. Although expectations for continued earnings growth among S&P 500 companies justifies a more optimistic view today, elevated stock valuations and what are now perceived to have been overly optimistic expectations finally caused investors to hit the pause button. 

With the Dow Jones Industrial Average and S&P 500 Index off their highs, investors are likely doing a little soul-searching.

Some investors may be questioning the outlook for stock prices following a nearly nine-year bull market run. Over recent weeks, the market has provided the first real test of investors’ will in almost two years. 

A change that is not out of the ordinary

The S&P 500 Index fell into correction territory in early February, defined as a decline of 10% or more from its peak level. On average, 10% corrections usually occur once a year. The last time a market correction occurred was early in 2016. Further, a 15% pullback happens, on average, once every two years, with the last occurring in August 2011. However, since stocks reached correction territory they have quickly clawed back some of their losses. More attractive valuations and still favorable growth expectations have allowed investors an opportunity to put cash to work at cheaper prices. 

Are you a bull or bear?

To help provide some perspective on the current market environment, we outline both the bull and bear market cases for investors.

The bull argument for further upside in stock prices points to the following:

  • Continued synchronized economic growth worldwide
  • Expectations for double-digit earnings growth for U.S. companies in the 4th quarter of 2017 as well as for full-year 2018
  • Potential near-term fuel from the resumption of corporate buyback activity following a quiet period during earnings season
  • Added tailwinds from the recently-reduced U.S. corporate tax rate
  • A possible boost from additional U.S. fiscal spending and a potential infrastructure bill
  • Little expectation of negative events across other asset categories that could carry over to the stock market (e.g., generally stable conditions in high yield credit markets)
  • An absence of recession indicator warning signs, which typically signal an end to a bull market

Nevertheless, the bear case for stocks argues the following:

  • Systemic risks from the use of obscure trading and leverage strategies by institutional investors that may be contributing to the market’s volatility
  • Rising bond yields, which over time can attract investment dollars at the expense of riskier assets like stocks
  • Rising inflation pressures, which could slow economic growth and reduce corporate profitability
  • Deficit concerns, fueled by the combination of fiscal spending and tax cuts, which boost short-term growth but potentially result in longer-term economic issues
  • Global central bankers ending their ultra-loose money policies, which provided a strong tailwind for asset prices following the financial crisis

Choosing your investment approach

In our opinion, both the bull and bear arguments are valid and illustrate the risk and opportunity in the market today. The truth lies somewhere in the middle, which we believe calls for a prudent and diversified portfolio approach.

Like similar periods in the past, market turbulence eventually passes. After the dust clears, investors can more prudently reassess and evaluate their next moves.

Market volatility may continue in the short term, causing stock prices to ebb and flow. However, global growth is expected to accelerate in 2018, at the same time the trajectory for corporate earnings growth is elevating. These are strong fundamental drives that could ultimately lead to higher stock prices over the intermediate-term.

Following the principles of diversification means you don’t have to decide whether you are a bull or a bear. Rather you only have to determine if you’re an investor and are willing to maintain discipline during times when volatile markets make it more difficult to do so. During times of volatility and market uncertainty, it’s important to discuss your investment strategy with your advisor. They can help you evaluate current conditions and advise you on next steps based on the context of your long-term financial goals.

Like similar periods in the past, market turbulence eventually passes. After the dust clears, investors can work with their advisor to more prudently reassess and evaluate their next moves. 

The numbers


As of January 10, 2018

Data source: Morningstar Direct

S&P sector returns YTD

An index is a statistical composite that is not managed. It is not possible to invest directly in an index.

Standard & Poor’s (S&P) 500 Index
The S&P 500 is a basket of 500 stocks that are considered to be widely held. The S&P 500 index is weighted by market value (shares outstanding times share price), and its performance is thought to be representative of the stock market as a whole. The S&P 500 index was created in 1957 although it has been extrapolated backwards to several decades earlier for performance comparison purposes. This index provides a broad snapshot of the overall U.S. equity market. Over 70% of all U.S. equity value is tracked by the S&P 500. Inclusion in the index is determined by Standard & Poor’s and is based upon their market size, liquidity, and sector.

Russell 2000 Index
The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set. The Russell 2000 includes the smallest 2000 securities in the Russell 3000.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of the following 21 developed market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. As of June 2, 2014.

MSCI Emerging Markets Index
The MSCI Emerging Markets Index is a free float‐adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 23 emerging market country indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. As of June 2, 2014.

Barclays Capital U.S. Aggregate Index
The Barclays Capital U.S. Aggregate Index is an index comprised of approximately 6,000 publicly traded bonds including U.S. government, mortgage-backed, corporate and Yankee bonds with an average maturity of approximately 10 years. The index is weighted by the market value of the bonds included in the index. This index represents asset types which are subject to risk, including loss of principal.

Bloomberg Commodity Index
Formerly known as the Dow Jones UBS Commodity Index. The Bloomberg Commodity Index is calculated on an excess return basis and composed of futures contracts on 22 physical commodities. It reflects the return of underlying commodity futures price movements.

Dow Jones U.S. Select REIT Index
The Dow Jones U.S. Select REIT Index intends to measure the performance of publicly traded REITs and REIT-like securities. The index is a subset of the Dow Jones U.S. Select Real Estate Securities Index (RESI), which represents equity real estate investment trusts (REITs) and real estate operating companies (REOCs) traded in the U.S. The indices are designed to serve as proxies for direct real estate investment, in part by excluding companies whose performance may be driven by factors other than the value of real estate.

The views expressed in this publication reflect the personal views of the Ameriprise Financial Services analyst authoring the publication. The views expresses are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

Information provided by third parties is deemed to be reliable but may be derived using methodologies or techniques that are proprietary or specific to the third-party source.

Except for the historical information contained herein, certain matters in this report are forward-looking statements or projections that are dependent upon certain risks and uncertainties, including but not limited to, such factors and considerations as general market volatility, global economic and geopolitical impacts, fiscal and monetary policy, liquidity, the level of interest rates, and historical sector performance relationships as they relate to the business and economic cycle.

Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value. Neither Ameriprise Financial, nor any of its advisors or representatives, provides tax advice.

Past performance is no guarantee of future performance. Diversification does not assure a profit or protect against loss.

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