Author: Tim Courtney
In the first quarter, the U.S. stock market endured some of its biggest daily gains or losses in years — and the wild ride could continue in April.
March 30, 2018
Watching the stock market daily in 2017 made for a rather dull sport, even though it was a boon for investors, as stock indexes notched record after record.
Not so this year. Investors have been more prone to push the buy or sell button, giving the Standard & Poor’s 500 Index some of its biggest daily gains or losses in years. It also succumbed to a 10% correction in February. While investors were seemingly impervious to any hint of bad news in 2017, that’s since changed.
April has been the best performing month for the S&P 500 in the past 20 years, delivering average monthly returns of 1.8% in that period, according to data compiled by Frank Cappelleri, executive director at brokerage firm Instinet.
But like the oft-cited saying that “past performance is no guarantee of future results,” the market hasn’t exactly conformed to historical trends, and the S&P 500 is down 1.2% year to date. (That could actually be a good thing for new investors. Learn more about how to start investing in stocks.)
From corporate earnings to the 24-hour news cycle, here’s what professional investors will be watching in the month ahead.
Looking back to look forward
The stock market is forward-looking, but much of the information investors analyze is backward-looking. During April, there will be an opportunity to reflect on the first quarter, and there may be varying signals based on economic reports and corporate earnings.
Come late April, public companies will begin releasing quarterly results as part of the multiweek earnings season. Based on analysts’ projections, companies in the S&P 500 could report earnings that are 17.3% more than those in the first quarter of 2017. If so, that would mark the highest rate of earnings growth since 2011.
“This kind of earnings growth is extraordinary and it’s probably going to trump any kind of economic weakness.”
DAVID JOY, CHIEF MARKET STRATEGIST OF AMERIPRISE FINANCIAL
Meanwhile, forecasts for first-quarter economic growth have been lowered from 5%-plus in late January to 2.4% currently. The first of three estimates of first-quarter gross domestic growth is scheduled to be released April 27.
“It looks as though earnings are going to be very strong in the first quarter despite maybe weaker-than-expected economic performance,” says David Joy, chief market strategist of Ameriprise Financial. “But to get this kind of earnings growth is extraordinary and it’s probably going to trump any kind of economic weakness.”
Joy expects economic growth to accelerate the remainder of the year, thanks in part to the stimulative effects of tax reform and the recently passed Congressional spending deal.
But there could be a “couple caveats” to this optimistic outlook if a trade war seems more likely or inflation accelerates to a point that investors fear the Federal Reserve will be more aggressive in raising interest rates, he adds.
How to prepare: U.S. stocks still are a good investment and likely will get some “tailwind” from earnings reports, Joy says. But inflation is expected to move higher this year, and that will put pressure on bond yields. Investors should consider moving into shorter-duration maturity bonds or upgrade the credit quality of corporate bonds, he recommends.
More volatility is likely
If you feel like there’s too much news lately, you’re not alone. From economic reports to talk of trade wars, investors can’t afford to ignore the news.
“I don’t think there’s any way to avoid greater volatility ahead.”
TIM COURTNEY, CHIEF INVESTMENT OFFICER OF EXENCIAL WEALTH ADVISORS
“There are a lot of things swirling around,” and that’s put investors on edge, says Tim Courtney, chief investment officer of Exencial Wealth Advisors. Even after recent declines in the market, stock prices still are expensive by historical standards — and that raises the stakes for investors who’ve questioned everything from the pace of economic growth to the trajectory of interest-rate increases to the possibility of a trade war this year, he says.
“If there’s some kind of news that pops up that’s not expected, that’s going to move the markets,” Courtney says. “With all these variables right now, I don’t think there’s any way to avoid greater volatility ahead.”
Volatility, or wild swings in stock prices, already has made a comeback. The S&P has risen or fallen more than 1% on 23 days — or nearly 38% of the time so far this year. By comparison, moves of such magnitude happened only eight times in 2017.
“None of this should concern long-term investors,” Cappelleri says. Instead, investors should be aware that volatility provides opportunities, he adds.
Similarly, Courtney tries to prepare his clients for the likelihood of more volatility ahead. He thinks the U.S. stock market will endure one or maybe two more corrections like the one in February this year.
“But you must resist that temptation to jump into the fray and sell,” Courtney says.
How to prepare: Given last year’s run-up in stock prices, many of the biggest stocks remain very expensive, so Courtney is advising clients to revisit their diversification strategies. He recommends investing money in international stocks or smaller U.S.-based companies, both of which look comparatively cheap right now.
Stock market forecast
The first three months of the year have made for a more thrilling stock market, but if you’re invested for the long run, you shouldn’t stress about the events of one day, one week or even one month. Trying to time swings in the market based on short-term disruptions is difficult to do successfully, even for professionals.
And the outlook still looks positive for U.S. stocks, as folks on Wall Street don’t see the current bull market ending anytime soon. Based on analysts’ target prices for all stocks in this index, the S&P 500 could climb past 3,000 this year, according to data compiled in early March by DataTrek Research. That’s a 17% increase from the current level.
“Folks on Wall Street Don’t see the current bull market ending anytime soon.”
Meanwhile, the recent bout of market volatility hasn’t resulted in more bearish sentiment. About 35% of individual investors expect stock prices to fall in the next six months, according to a weekly sentiment survey conducted by the American Association of Individual Investors. That’s about on par with levels seen in November and December, when stocks still were setting record highs.
Buying into the market when stock prices are fluctuating can be intimidating. But that shouldn’t deter you from participating in what’s proven to be a fantastic long-term investment. The market undoubtedly will go up and down in the course of your investing timeline. One way to minimize the risk of a big shock to your portfolio is to ensure you spread money across a variety of assets and develop a discipline of investing regularly.
Finally, long-term investors can be opportunistic and take advantage of market dips. Dollar-cost averaging, which involves regularly adding money to your investments to help smooth out your purchase price, ensures you won’t dump all your money in when stock prices are at a peak.
About the author
Anna-Louise is a personal finance writer at NerdWallet. Her work has been featured by Bloomberg, CNBC, The Associated Press and more.