Stock Market Outlook: Where Do We Go From Here?

Just as a broken clock is correct twice a day, people who prognosticate about the stock market are sometimes spot on. (Never mind all the times they’re dead wrong.)

Market watchers warned that U.S. stocks could experience violent swings in October 2018 — and the market spent much of the month lurching wildly. The S&P 500 rose or fell in excess of 1% on 10 days in a 16-day stretch, after a 74-day run with no moves of such magnitude. Rising interest rates and the prospect of slower global economic growth were generally seen as the culprits, though the Nov. 6 midterm elections and ongoing trade talks also contributed to volatility.

In some ways, the return of volatility was normal and to be expected. Since 1950, October has been the month with the most market swings of 1% in either direction, according to data compiled by LPL Financial.

With the S&P 500 ending October down 6.9%, the worst month in more than seven years, the question now is: Where do we go from here? Some people worry the worst of the market’s slump isn’t over, but professional investors generally believe stocks will bounce back through the end of the year. Here’s what they’ll be watching in November:

The economy, the Fed and markets

The Federal Reserve Open Market Committee, which sets a target for interest rates, meets in early November, but investors don’t expect an increase until its mid-December meeting. In the meantime, investors will do two things: scrutinize the same economic data that policymakers monitor and predict the number of interest rate hikes in 2019.

The Fed has signaled three rate increases for next year, but many investors believe there will be only two, says Kate Warne, the investment strategist at Edward Jones. The strength of the U.S. economy will be a deciding factor. “The question is: Are we continuing to see signs of solid economic growth or is it slowing, as people have expected?” she says.

Two different measures of inflation will be watched closely for any sign that expectations for Fed rate hikes may need to change, Warne says. Unless there’s a dramatic change from the recent trend of about 2% inflation, any market volatility in response is likely to be short-term, she adds.

What to do: Stocks have outperformed bonds year-to-date, and “some investors are wondering why they own bonds at all,” Warne says. But the prospect of lower returns and continued volatility in the stock market means it’s wise to make sure your portfolio has a good mix of stocks and bonds, she advises.

What’s fundamentally changed?

It’s easy to get rattled by a slump in the market, especially when the S&P 500 plummets more than 3% in one day, as it did twice in October. There have been four such declines year-to-date; historically, such moves happen roughly two to three times a year, according to figures from Commonwealth Financial Network. The S&P 500 was up 1.4% for the year through the end of October.

January may feel like a lifetime ago, but when it comes to the issues vexing investors, not much has changed, says Yana Barton, a vice president and equity portfolio manager at Eaton Vance. Those concerns include the upcoming midterm elections, rising interest rates, geopolitical risks and rising inflationary pressure, she says.

Those risks remain, Barton says, as do others, including expectations of more subdued corporate earnings growth and fluctuations in currencies that weigh on companies doing a lot of business outside the U.S. But neither are news to professional investors, and they do little to explain a more bearish stance among many lately, she adds.

“People have been indiscriminately buying and selling the market,” Barton says.

What to do: The recent pullback has created opportunities for long-term investors willing to do research to pick up stocks at lower prices. Many U.S. companies — including those with a leg up on innovation or 100% domestic business — remain attractive investments, Barton says.

Stock market forecast

On and off Wall Street, surveys show that investors — be they strategists, financial advisors or retail investors — generally remain optimistic about U.S. stocks in the short, medium and longer term, though two of the surveys were conducted before the recent bout of volatility.

An indicator of Wall Street sentiment that’s based on the average recommended equity allocations by strategists has been roughly the same for most of 2018. It’s at a level that historically has seen positive returns 93% of the time in the following 12 months.
Meanwhile, 54% of financial advisors are bullish about the market for the remainder of the year, according to a quarterly survey conducted by Eaton Vance.
Forty-one percent of retail investors expect stock prices will be lower in the next six months. That’s the highest reading since mid-April, but the S&P 500 has risen in that six-month period.

If the most recent bout of volatility has you on edge, the best course of action is to fight your fears and keep investing. One of the biggest risks during turbulent times in the stock market is investors themselves — those “will get shaken out of the market at the worst time,” Barton says.

In addition to tuning out any financial news that might influence your investing process, these simple mantras may help:

Volatility is inherent in investing. Take that as a given and don’t stress about daily gyrations if you’re invested for the long-term.
Don’t try to time the market. If you try to sell when you think the market’s peaked, you’ll likely be wrong.
Keep adding money to the market at regular intervals. This strategy, known as dollar-cost averaging, smooths out your purchase price over time.
Diversify your portfolio to reduce overall risk. That means having a mix of stocks and bonds, as well as assets from different geographic regions.

More at: Nerdwallet.com