For the majority of summer, the markets were relatively calm with a gradual and orderly increase in the three major stock market indexes. However, since the end of August the trend has reversed, volatility has increased with several large downward moves. For example:
Nasdaq Composite1 dropped 13.06% from August 29 to October 29th.
S&P 500 index2 dropped 9.4 % between September 20 and October 29
Dow Jones Industrial Average3 dropped 8.9% from October 3 to October 29
While prices have since rebounded modestly, we are still well below the highs of a few months ago.
Anytime there is a larger than “normal” move in stock prices, the question that usually comes up is, “what’s moving the market?” The answer is always corporate profits, or more specifically what effect are certain economic and political factors having on those profits. Usually there is more than one driving force. Factors currently weighing on the market include: rising interest rates, trade issues with China and the mid-term elections.
Rising interest rates – There is no more established relationship in finance than that between interest rates and stock prices. Rising rates means capital is more expensive, therefore companies will use less, which means less growth initiatives, expansion and research and development. The thinking is this could reduce future earnings and the bottom line may suffer, making the stock less attractive. Currently, rising interest rates are creating headwinds for the overall stock market. The interest rate that moves markets is the federal funds rate. So far this year there have been three rate increases by the Federal Open Market Committee, setting the target between 2 and 2.25%. The FOMC is a branch of the federal reserve board that determines monetary policy. Simply put, they will make it more expensive to borrow money if they feel the economy is overheating, and less expensive when the economy is sluggish.
Trade issues with China – While the current situation surrounding trade with China is very complex, it is, however sound general economic principle, that restrictions/tariffs are bad for economic growth. While we believe these issues will get worked out eventually, until then, this could continue to be a thorn in the markets side.
Mid-term elections – These can be a non-event, but if there is a major swing in the balance of power to that of more government influence (regulation) on business, then we’d predict that scenario being a negative for stock prices.
Conclusion: One thing the financial markets despise above all else is uncertainty. Will this uncertainty lead to “A Wild Ride?” These events are part of the normal course of business and there has never been a time when we didn’t have to deal with the particular uncertainties of the day. Our current issues will eventually be resolved, and inevitably others will crop up, and the ride will go on.
1.The Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange
2. The S&P 500 Index (formerly Standard & Poor's 500 Index) is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies by market value, The index is widely regarded as the best single gauge of large-cap U.S. equities
3. The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the Nasdaq. The DJIA was invented by Charles Dow in 1896.
Tom Ferrell CFP(R)
Securities offered through Cantella & Co., Inc., Member FINRA/SIPC.