The recent (mid-November) slide has brought the U.S. stock market back to where it started 2018. Looking back further for better perspective, the S&P 500's return (including dividends) was 5.2% over the past year and 10.6% per year on average over the past five years. In Canada, the TSX has declined 4% over the past year, but has returned 5.2% on average over the past five years.
Although pullbacks are disappointing, they're not unusual. In our view, this one isn't a sign of problems to come. Instead, it shows investors are resetting their expectations to reflect slower economic and earnings growth next year.
Retailers add to market worries – Disappointing earnings reports from some major U.S. retailers added to concerns about technology growth rates and the rising risks of trade and tariff disruptions. But consumers remain optimistic, and retail sales rose faster than expected in October. Better wage growth and lower oil prices mean consumer spending should stay healthy, helping power solid economic growth.
Slower earnings growth ahead – Companies in the S&P 500 have reported earnings growth of about 25% for the past three quarters. But as the impact of the corporate tax cut and stronger economic growth fades, earnings are likely to rise less than 10% in 2019. That's still above average, but we expect more volatility ahead as investors adjust.
Tech gives back some gains – Fast-growing technology stocks have been among those with slower expected growth rates, and as a result, technology stocks have given back some of this year's gains. Technology was the best-performing sector of the S&P 500 over the past five years and one of the best this year.
Trade negotiations add volatility – Trade and tariff progress is likely to be slow, but we expect negotiations will resolve many of the issues that have prompted the trade war with China. That's why we think there could be more trade-related volatility ahead and signs of progress would be positive for stocks.
We think this return to normal volatility is typical of the later part of the economic cycle, but it doesn't mean the cycle is near its end. In our view, the outlook is for slower economic and earnings growth, which can extend the cycle further and support rising stock prices over time. Market volatility tends to rise during times of greater uncertainty and when the expectations are changing. Owning the right mix of stocks and bonds based on your comfort with volatility and goals can help you keep a long-term perspective and stay invested during pullbacks.
For more information or to open an account, set up a face-to-face meeting with an Edward Jones advisor in your community.
Past performance does not guarantee future results.
Investors should understand the risks involved in owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates, and investors can lose some or all of their principal.
It is intended for informational purposes only.
It is believed to be reliable, but its accuracy and completeness are not guaranteed.
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