Concerns about global growth caused markets to hit the brakes last week in a cloud of smoke and volatility, giving the S&P 500 and Nasdaq their worst week since May 2012. For the week, the S&P 500 lost 3.14%, the Dow slid 2.74%, and the Nasdaq dropped 4.45%.1
LAST WEEK IN REVIEW
Macro-economic issues dogged markets last week and investors fell prey to concerns about issues like slowing growth in Europe, Ebola, the situation in Ukraine, and the coming end to the Federal Reserve’s quantitative easing programs. A confluence of fears helped open up a trapdoor beneath stock markets, but much of the selloff can be attributed to concerns about how a strong dollar and a weak European economy could hurt company profits. Both of these factors may combine to erode demand for U.S. exports and hurt businesses that rely on overseas demand.2
On the other hand, a weaker euro might be just the ticket Europe needs to stoke demand for its exports and jumpstart economic growth, much as a soft dollar helped pull the U.S. out of recession. A weak euro makes European products more competitively priced, hopefully boosting demand and giving the Eurozone economy a push.
MARKET SELL OFF
As investor sentiment swung towards a fear-based selloff, investors ignored positive domestic economic news in favor of pessimistic headlines and questioned the soundness behind the recent run-up in stock prices. It’s not uncommon for periods of strong market gains to be interrupted by short-term pullbacks, but as long as the underlying economic trends in the U.S. remain solid, we can hope for more upside this year.
BOTTOM LINE: Threats to the market exist in the form of a slowdown in global growth and wildcards like the Ebola epidemic and security issues overseas. However, overall, the U.S. economy is doing well and many sectors are experiencing broad-based growth that’s driven by solid economic fundamentals. Though markets slid last week, let’s take a look at how far we’ve come since last year: As of last Friday, the S&P 500 has gained 12.62% since October 14, 2013.3 While these pullbacks are often frustrating, keep in mind that as goal-based investors, we are more focused on how long-term performance affects our personal financial goals and less focused on short-term market behavior.
With a thin economic calendar next week, analysts will be shifting their attention to Q3 earnings as U.S. banks and some technology companies begin to report. Historically, as earnings season ramps up, analysts tend to focus less on macro-economic issues in favor of company-level data. Thus far, earnings expectations are modest, with S&P 500 companies expected to show 1.6% earnings growth on 1.7% higher revenues. However, keep in mind that many companies purposefully keep the bar set low so that they can benefit from positive earnings surprises. While more volatility is likely, positive earnings results could shift sentiment and encourage investors to buy the dip and give stocks a boost.4
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