A note about recent market volatility

Mike Loewengart, Vice President of Investment Strategy

E*TRADE Capital Management

05/13/19

After a solid start to the year for equities—the S&P 500® gained more than 18% through April—investors are now seeing a resurgence in volatility amid a breakdown in US-China trade negotiations. After the US threatened tariff hikes on $200 billion of goods imported from China last week, China announced retaliatory tariffs on US imports as of June 1.

While it appears that a trade agreement could be a long way off, it is also possible that the US and China are ramping up rhetoric in order to gain negotiating leverage. 

Market volatility not unprecedented

The financial markets may have gotten ahead of themselves earlier this year by pricing in a US-China trade deal. Regardless, market volatility of this magnitude is not uncommon and a correction (10% drop in equity prices) cannot be ruled out as the trade dispute pressures stocks and other risk assets.    

While the trade dispute is winning headlines and has been a major contributor to market movements of late, market volatility should be viewed within the broader context of economic trends and a long-term approach to investing.

Key points for investors to bear in mind:

1.  Market conditions can change quickly: Although no trade negotiations are scheduled for the near-term, both the US and China are motivated to come to an agreement and talks could progress quickly. This would likely go a long way toward settling the markets. The impressive rebound in equities through April after a challenging fourth quarter in 2018 illustrates how resilient the financial markets have been.

2.  The US economy is fundamentally strong: US economic growth has recently accelerated on the strength of historically low unemployment, moderate inflation, and low interest rates. Additionally, corporate earnings have been robust, and most equity valuations are not excessive. Collectively, this creates an environment conducive to continued equity gains.

3.  Maintain a long-term perspective: Investors with a long-term investment horizon should not be surprised to see heightened market volatility, and long-term investment decisions should not be influenced by headlines of the day or periodic near-term volatility. 

4.  Diversification is key:  Diversified portfolios are constructed for market disruptions. Portfolios with a broad range of uncorrelated asset classes can potentially help buffer against market volatility and help produce smoother risk-adjusted returns over long time horizons.

While near-term bouts of market volatility are never fun, they create opportunities to reassess individual risk tolerance and underscore the importance of a diversified approach to long-term investing.

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Mike Loewengart
Vice President, Investment Strategy, E*TRADE Capital Management, LLC

Mike Loewengart is the Vice President of Investment Strategy for E*TRADE Capital Management, LLC. Mike is responsible for the asset allocation and investment vehicle selections used in E*TRADE’s advisory platforms. Prior to joining E*TRADE in 2007, Mike was the Director of Investment Management for a large multinational asset management company, where he oversaw corporate pension plan assets. Early in his career, Mike was a research analyst focusing on investment manager due diligence for the consulting divisions of several high-profile investment firms. Mike holds series 7, 24, and 66 designations, as well as the Chartered Alternative Investment Analyst (CAIA) designation. He is a graduate of Middlebury College with a degree in economics.

Andrew Cohen, CFA
Director, Investment Strategy, E*TRADE Capital Management, LLC

Andrew Cohen is a Director of Investment Strategy for E*TRADE Capital Management, LLC. Prior to joining E*TRADE, Andrew was the Director of Investments and Operations for a large Registered Investment Advisor, where his responsibilities included investment manager research, asset allocation, and portfolio construction. Previously, he was a Senior Research Analyst and Team Leader for a leading wealth management platform. He is a CFA® charterholder and a member of both the New York Society of Security Analysts and CFA Institute. He is a graduate of Virginia Tech with a BS in finance.

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