Stocks Decline as Investors Await Fate of Tax Plan
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 11/10/17. Rates and Economic Calendar Data from Bloomberg as of 11/13/17. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
The U.S. stock market fell last week as concerns about delays in corporate tax reform weighed on risk assets. The S&P 500 and Russell Midcap indexes fell 0.1% while the smaller-cap Russell 2000 index fell 1.3%. As we’ve discussed in recent posts, small cap stocks likely stand to benefit more from corporate tax reform than larger firms and, as last week would suggest, appear to be more aligned with the success or failure of the bill. Internationally, developed markets lost 0.4% while emerging markets gained 0.2%.
The drop in the S&P 500 index last week broke a string of 8 consecutive weekly gains that dates back to the beginning of September. This slight decline appears to have some concerned so we thought it would be helpful to try and put last week’s performance in perspective. Over the past 15 years, the S&P 500 index has experienced 334 weekly losses averaging -1.7%. The largest weekly loss over this time period was an 18.2% decline in October of 2008 when the “Great Financial Crisis” was in full swing. Considering the health of the global economy and that volatility has been suppressed over the past 12 months we recognize the past 15 years may not be the most relevant comparison. So, if we shrink our analysis to only include the past year, we see that the market has experienced 18 weekly losses averaging -0.6%. The largest weekly decline over the past twelve months was 1.4%. Not only was last week’s decline slight from a long term historical perspective but it was also only one third the size of the average weekly decline over the past year.
Now, this is not to say that meaningful volatility will never return. We simply want to put last week in perspective since investors haven’t had to digest a weekly loss in nearly two months. Over the next 12 months, policy uncertainty, the Federal Reserve’s balance sheet reduction, and geo-politics all have the potential to meet elevated equity valuations head-on and lead to a short term bouts of volatility. In our view, the next pullback is unlikely to be long lasting and we continue to recommend that investors maintain a longer term focus. Synchronized global economic growth, tame inflation, and solid earnings are all supportive of a continuation of this secular bull market. Without a well-defined set of investment objectives, however, any market insight we are able to provide may prove to be futile for investors. For this reason, we stress that investors complete a robust financial planning process to help ensure that their portfolio holdings are aligned with their goals and tolerance for risk. If you would like to learn more about how we are helping clients with both investment management and financial planning services, please do not hesitate to speak with your Hennion & Walsh Financial Advisor.
Important Information and Disclaimers
Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion & Walsh cannot guarantee the accuracy of said information and cannot be held liable. This information is provided for informational purposes only and is not a solicitation to buy or sell any of the asset classes or sectors discussed.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner’s tax bracket.
The prices of small company and mid cap stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
Investors cannot directly purchase any index.
LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITSs that primarily own and operate income-producing real estate.