Volatility was back in full force last week. The three major domestic indexes posted several days of losses before experiencing wide swings on Friday. By week's end, the CBOE Volatility Index (VIX), which investors use to help measure fear in the markets, had increased by approximately 70%. The VIX also reached its highest point since February.[1]

Despite a number of equities posting last-minute gains on Friday, all three domestic indexes had sizable losses for the week. In fact, they posted their worst weekly performance since March.[2]  The S&P 500 dropped 4.10%; the Dow declined 4.19%; and the NASDAQ gave back 3.74%.[3] International stocks in the MSCI EAFE also lost ground, decreasing 3.96%.[4] 


What drove market performance last week? As is typically the case, a number of details affected investor sentiment and behavior. The following topics were among the perspectives impacting performance:  

  • Rising interest rates: In addition to the Fed's interest rate increases, 10-year Treasury yields are on many investors' minds. At one point last week, the 10-year reached its highest yields since 2011.[5]  As interest from banks and bonds rise, some investors exit the markets in search of more predictable returns. These moves can cause stock prices to drop.[6] However, we want to remind you of what we wrote about last week: rising rates may bring their own risks, but they are a sign that the economy is growing.[7] 
     

  • Falling tech prices: Technology companies have been the best market performers in 2018. However, the sector just experienced its worst weekly results since this spring.[8]  With this shift in industry performance, some market participants have begun searching for different ways to invest their money.[9]
     

  • Ongoing trade tension: While many analysts believe interest rates and tech prices drove last week's losses, some feel that our trade renegotiation with China is to blame.[10]  We do not yet know how this skirmish will resolve, but tariffs do have the possibility to slow economic growth and increase prices for consumers.[11] 

These concerns and perspectives are important, but they do not give a complete understanding of our current economic conditions. Consumer sentiment remains high, and the latest corporate earnings season is likely to show strong, double-digit earnings growth for companies.[12] 

We know that volatility can feel uncomfortable, but it is normal. In the past 38 years, the markets have averaged a 13.8% intra-year decline, yet 29 of those years had positive returns.[13] 

As always, we are continuing to monitor economic fundamentals and investor perspectives to find a clear view of where we are today, and what may be ahead. If you have any questions, we are here for you.

ECONOMIC CALENDAR

  • Monday: Retail Sales

  • Tuesday: Industrial Production, Housing Market Index

  • Wednesday: Housing Starts

  • Thursday: Jobless Claims

  • Friday: Existing Home Sales


Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

Diversification does not guarantee profit nor is it guaranteed to protect assets.

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.

The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.

The Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of stocks of technology companies and growth companies. 

The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indices from Europe, Australia, and Southeast Asia. 

The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

The Federal Reserve System (also known as the Federal Reserve and, informally, as the Fed) is the central banking system of the United States. The Federal Reserve System is composed of 12 regional Reserve banks which supervise state member banks. The Federal Reserve System controls the Federal Funds Rate (aka Fed Funds Rate), an important benchmark in financial markets used to influence the supply of money in the U.S. economy.

The Chicago Board Option Exchange (CBOE) Volatility Index (VIX) shows the market's expectation of 30-day volatility.  It is constructed using the implied volatilities of a wide range of S& 500 index options.  This volatility is meant to be forward-looking, is calculated from both calls and puts, and is a widely used measure of investment risk, often referred to as the "investor fear gauge."

Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

Past performance does not guarantee future results.

You cannot invest directly in an index.

Consult your financial professional before making any investment decision.

Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.

These are the views of Platinum Advisor Strategies, LLC, and not necessarily those of the named Broker dealer or Investment Advisor, and should not be construed as investment advice. Neither the named Broker dealer or Investment Advisor gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.

[1] www.cnbc.com/2018/10/12/us-markets-data-and-bank-earnings-in-focus.html 
[2] www.cnbc.com/2018/10/12/us-markets-data-and-bank-earnings-in-focus.html
[3] http://performance.morningstar.com/Performance/index-c/performance-return.action?t=SPX®ion=usa&culture=en-US
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=!DJI®ion=usa&culture=en-US
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=@CCO
[4] www.msci.com/end-of-day-data-search
[5] www.bloomberg.com/news/articles/2018-10-12/another-gut-wrenching-week-puts-2018-stocks-in-with-bad-company?srnd=markets-vp
[6] www.forbes.com/sites/markavallone/2018/10/11/5-reasons-why-higher-interest-rates-matter/#50fabc87577d
[7] www.investopedia.com/investing/how-interest-rates-affect-stock-market/
[8] www.cnbc.com/2018/10/12/us-markets-data-and-bank-earnings-in-focus.html
[9] www.bloomberg.com/news/articles/2018-10-12/another-gut-wrenching-week-puts-2018-stocks-in-with-bad-company?srnd=markets-vp
[10] fortune.com/2018/10/11/trump-federal-reserve-powell-lagarde-carney/
[11] www.businessinsider.com/trump-trade-war-tariffs-china-effect-2018-10
[12] wsj-us.econoday.com/byshoweventfull.asp?fid=485860&cust=wsj-us&year=2018&lid=0&prev=/byweek.asp#top
www.cnbc.com/2018/10/12/us-markets-data-and-bank-earnings-in-focus.html
[13] am.jpmorgan.com/us/en/asset-management/gim/adv/insights/guide-to-the-markets/viewer  [p.14]