Stock Market Volatility, Geopolitics and Midterm Elections – Oh My! Should Investors Be Worried?
Let's break down some concerns on investors' minds this year and see where that leaves us going forward. The situation may not be as scary as it sounds.
If you've spent any time watching market news this year, you've likely experienced the roller coaster of recent stock volatility. I've had a lot of questions about whether it's different this time, or whether we're heading for a tough correction.
There are a lot of factors involved in this year’s volatility, but that doesn’t mean it’s all bad news out there.
What’s going on here?
A couple of the major drivers of volatility this year have been centered around economic uncertainty and geopolitics.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The Federal Reserve has started reining in its generous policies (like low interest rates), which it implemented after the financial crisis. That could have an impact on lending rates both at home and abroad. While the Fed is implementing more conservative policies as a result of a strengthening U.S. economy, there are market observers who worry about implications for other economies – and for the stability of the U.S. economy should our trade relationships change significantly.
As the U.S. renegotiates NAFTA and engages in trade negotiations with China — a process that has been somewhat volatile — markets have been constantly trying to predict and absorb the potential implications.
Geopolitics are also a factor. From OPEC statements that have led to uncertainty about future oil prices to the complicated situation in North Korea, we’ve seen varying degrees of hope, confusion and volatility. More recently, political turmoil in Italy brought additional (and renewed) fears about prospects for the eurozone and even the stability of the European Union itself.
The historical context
Finally, our own political climate could be having an important impact – but not in the way you might think.
Historically speaking, midterm election years are more volatile than other years. In fact, in eight out of the last nine midterm election years, the S&P 500 lost between 7% and 20%. Through April 2018, the S&P 500 was down about 10% from its high in January. However, as of this writing, the index is still slightly positive for the year.
If you ask me, that on its own tells you something. Markets don’t like uncertainty: The more there is, the more volatile things tend to become. In midterm years, the political order could be upended and shift the balance of governance – which could shift the balance of policy and predictability.
But, taken together, all these factors have made for a year where we’ve seen market swings that are more numerous and more pronounced than anything we experienced in the previous two years.
In fact, according to Bloomberg, down days are 24% bigger in magnitude this year than up days — a difference in performance that hasn’t been recorded since 1948. Whether you feel confident about your understanding of what’s going on or not, it’s enough to give anyone pause.
Should you be worried?
All that said, there’s still a lot of good news that sometimes gets drowned out by the bad.
Large companies are doing very well in terms of earnings and activity, and implied volatility going forward is actually pretty low compared with historical averages. While economic growth in the first quarter came in lower than expected, rising 2.2% on an annualized basis, it was still above the long-term average of 2%. There are indications that second-quarter growth will be even stronger.
There could also be important benefits for businesses (and thus investors) thanks to a trimming down of the Dodd-Frank Act, which had put more stringent rules on banks following the financial crisis. I believe small and midsized banks will now find it easier to operate — and to lend money.
Additionally, with lower taxes on corporations and repatriated profits because of the new tax plan, I believe we’re entering a period where companies will be able to invest in their operations, expand and grow. This is potentially very good news for investors.
Global economic prospects are also positive. In fact, European markets have been more stable than ours this year as the European Union builds economic momentum.
Here’s what I think
Even if trade tensions continue and even if geopolitics remain challenging, the prospects — both at home and abroad — are positive. I believe we’re closer to the bottom of this challenging period than to the top, and I think it’s important to look beyond a few months’ worth of volatility to get a real sense of where we are and where we’re going.
Of course, markets can surprise anyone, and there’s always a chance of a curveball throwing all our collective predictions off course. But in this situation, I think the numbers speak for themselves. If you have a longer-term investment time horizon and a prudent investment strategy that’s suitable for you, I don’t think volatility should be at the top of your mind.
Written by Bradford Pine with Anna B. Wroblewska.
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
Brad Pine is a wealth adviser and president of Bradford Pine Wealth Group, based in Garden City, N.Y. BP Wealth Group assists individuals and entrepreneurs to create wealth, simplify their lives and plan for retirement. Honesty, integrity and reliability are the foundations of Pine's investment philosophy.
-
Earn Delta SkyMiles Worth Up to $1,800 with an AMEX Business Card
Delta SkyMiles and American Express offer 150,000 on business credit card for new cardholders.
By Ellen Kennedy Published
-
Stock Market Today: Markets Soar Amid Strong Earnings for Big Tech
Equities ended the week on an up note thanks to some of the market's biggest names.
By Dan Burrows Published
-
How Annuities Can Help You Retire Early and Delay Social Security
Waiting until 70 to claim Social Security benefits can pay off, so how do you bridge the gap between giving up your paycheck and filing for benefits?
By Ken Nuss Published
-
How to Get Your Kids to Step Off the Gravy Train
A surprising number of young adults live with their parents. Setting some financial ground rules could get the kids out on their own faster.
By Neale Godfrey, Financial Literacy Expert Published
-
Spring Is a Good Time to Clean Up Your Finances, Too
While you’re decluttering your home for spring, consider also taking a crack at cleaning up your finances and old paperwork.
By Tony Drake, CFP®, Investment Advisor Representative Published
-
Is Your Retirement Solution Hiding in Plain Sight?
Here’s how to use your home equity in combination with an annuity contract to produce late-in-life income.
By Jerry Golden, Investment Adviser Representative Published
-
How to Choose Your Trustee or Executor of Your Will
Above all, you should choose someone you trust, keeping in mind that acting as a trustee or executor can be a complex, thankless and sometimes long-term job.
By John M. Goralka Published
-
Three Steps for Women to Take Control of Their Finances
These strategies are especially for women who are new to managing their money because of divorce or the death of a spouse.
By Emily Glassman Published
-
How AI Can Help Take the Emotion Out of Investor Decisions
AI-driven recommendations can complement human judgment, leading to more rational choices that aren’t as influenced by biases and blind spots.
By Francis Geeseok Oh Published
-
Can You 1031 Exchange into a REIT?
No, you can't, but two other REIT-like alternatives let you defer capital gains taxes while giving you exposure to institutional-quality real estate assets.
By Daniel Goodwin Published