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Bouts of U.S. Stock Market Volatility are Unlikely to Diminish This Summer

Investors in U.S. stocks may have felt like being on a boat where passengers are running to one side, then deciding all of a sudden to rush to the other side. It can be stomach churning, but risks are part of investing and bouts of volatility should persist. Joining the shifting crowd is not a successful way to invest; rather those that remain calm during the storms and keep their focus on the horizon have a much better chance of achieving their goals.

Déjà vu: a European country having political problems and fear rising that its membership in the Eurozone may be in doubt. This time it was Italy, with some sharp down moves on the initial political/election uncertainty—amid a spike in Italian yields. But a calming in those tensions helped U.S. stocks move to the top of their recent range. Continued turbulence is to be expected as the structural constraints in Europe remain but we don’t see long-lasting damage at this point. As a reminder, in another potential European “crisis”, the reaction to the Brexit vote in June 2016 was violent at the time, but looking back it was a minor squall in an ongoing bull market.

The U.S. ship remains solid

It’s nice to have a solid vessel with which to navigate rough waters, and it appears that the U.S. economy is just that. Consumers are gaining conviction in the economic expansion, with The Conference Board reporting a jump in consumer confidence; while the Bureau of Economic Analysis (BEA) reported that personal spending rose a better than expected 0.6%, continuing a rebound from softness seen earlier in the year.

Businesses are equally confident, with regional manufacturing surveys continuing to surprise on the upside; backed up by the national Institute for Supply Management’s (ISM) manufacturing index rising to a solid 58.7, while the new order reading rose to 63.7. Meanwhile the larger service side of the ledger remains strong, with the ISM non-manufacturing index rising to 58.6, while the new order component ticked higher to a robust 60.5.

And while the pricing components of these surveys have risen, the core personal consumption expenditure (PCE) measure of inflation—a favored measure of the Fed’s—is up only 1.8% versus the year ago period. Still-subdued inflation is somewhat remarkable given the tightness in labor market: payroll growth surprised on the upside with 223,000 jobs added in May, while the unemployment rate dipped to 3.8%—the lowest level since April 2000.

Fed expectations changing?

The tumult mentioned above, both internationally and domestically, resulted initially in the probabilities, as calculated by the fed fund futures market, of the pace of future hikes to be downgraded. But in the immediate aftermath of the strong May jobs report, those expectations bumped higher again. That said, some members of the Federal Open Market Committee (FOMC) have expressed some concern about the possibility of the yield curve inverting (when shorter-term rates become higher than longer-term rates), so there will likely remain heightened sensitivity to yield curve-related comments in the FOMC statement and subsequent press conference.

With near-term inflation risk still fairly benign, and global geopolitical pressures rising, we’ll be watching to see if other FOMC members join Minneapolis Fed President Neel Kashkari in believing that rates may already be near the “neutral rate”—a perceived level which doesn’t add to or deter economic growth—and that numerous future hikes may not be needed.

So what?

U.S. stocks have moved toward the top of the recent range but volatility is likely to rise at times during the summer as investors deal with various global geopolitical headwinds. Further strength in the U.S. dollar would likely exacerbate the volatility—particularly within emerging markets. But limited signs of pending recession risk—at least in the United States—should keep the path of least resistance for the stock market higher. That said, patience and discipline are more important than ever in the face of sometimes ominous-sounding headlines.


Important Disclosure

Investment involves risk. Past performance is no indication of future results, and values fluctuate. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Investing in emerging markets can accentuate these risks.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market, economic or political conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Diversification and rebalancing a portfolio cannot assure a profit or protect against a loss in any given market environment. Rebalancing may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events may be created that may affect your tax liability.

Past performance is no guarantee of future results. Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data.

The Consumer Confidence Index is a survey by the Conference Board that measures how optimistic or pessimistic consumers are with respect to the economy in the near future.

The Institute for Supply Management (ISM) Manufacturing Index is an index based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders and supplier deliveries.

The Institute for Supply Management Non-manufacturing Index is an index based on surveys of more than 400 non-manufacturing firms' purchasing and supply executives, within 60 sectors across the nation, by the Institute of Supply Management (ISM). The ISM Non-Manufacturing Index tracks economic data, like the ISM Non-Manufacturing Business Activity Index.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

About the author:
Liz Ann Sonder, Senior Vice President, Chief Investment Strategist, Charles Schwab & Co., Inc.
Jeffrey Kleintop, Senior Vice President and Chief Global Investment Strategist
Brad Sorensen, CFA, Director of Market and Sector Analysis, Schwab Center for Financial Research

Content provided by Charles Schwab, Hong Kong
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