Stock Market Pressure: Is There Fire, or Just Smoke and Noise?

Like Fourth of July fireworks, investors have been bombarded with lots of smoke and noise lately. The S&P 500® Index has pulled back from record highs reached in January, and market volatility has increased. Global trade concerns continue to dominate the headlines, while higher short-term U.S. interest rates and rising inflation also have kept stocks from breaking out of the range they’ve been in since February.

Should investors be worried? What’s important and what’s just noise?

Trade concerns

In recent months, the United States has imposed or threatened a broad array of tariffs against trading partners including China, Mexico, the European Union and Canada. Many of these trading partners have launched countermeasures against U.S. goods.

“Contentious trade negotiations have occurred in the past, but the fact that they’re being played out so publicly is a new phenomenon—resulting in rising trade-related market volatility,” says Liz Ann Sonders, Schwab’s chief investment strategist. “Although markets are clearly reacting to the day-to-day trade news, investors should refrain from trying to trade around the volatility.”

The tariffs that actually have been imposed so far affect a relatively small portion of the nearly $20 trillion U.S. economy, Liz Ann says. However, additional tariffs have been threatened, and over time the “second-order” effects of eroding consumer and business confidence could be a serious problem, she says.

“If the confidence of consumers or businesses is shaken, the potential grows for spending and capital investment to level off or decline,” Liz Ann says. That lack of spending and investment can have a significant impact on economic growth.

A sturdy bull market

Trade isn’t the only cause for concern—investors are also eyeing the rising value of the U.S. dollar against other currencies (which tends to hurt U.S. exports), slowing global economic growth and the possibility that the Federal Reserve could raise short-term interest rates too much and choke off economic growth.

However, the bull market is likely intact, Liz Ann says. U.S. companies have plenty of cash on hand, and tax reform has made it attractive to repatriate even more of their cash from foreign countries. That money can fuel business investment, expansion and stock buybacks, among other uses. Additionally, business and consumer confidence remains healthy, according to surveys such as the Institute for Supply Management’s Report on Business® and The Conference Board’s Consumer Confidence Index®.

Tax reform continues to provide a tailwind for the economy, while job growth remains strong: In June, more than 213,000 jobs were created, according to the U.S. Bureau of Labor Statistics. Although the unemployment rate ticked higher, it was still near a record low at 4.0%.

Second-quarter earnings season is starting, and with it should come a better look at both the health of the economy and the potential damage from the trade skirmish, Liz Ann says. In particular, investors should be watching for more cautious tones or any scaling back of capital spending plans, she says.

“Much of the sound and fury is best ignored by long-term investors, but there are growing risks to the bull market in the form of rising trade disputes and the possibility of a central bank mistake,” Liz Ann says. “For now, we believe the bull market is intact, but are growing more concerned and urge investors to remain disciplined and diversified.”

Next Steps

    • It can be hard to know if what you’re hearing warrants changes to your portfolio. Want to talk about it? Call our investment professionals at 800-355-2162.
    • Watch Schwab experts discuss other market and economic topics in the Stock Market Report.

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Investing involves risk including loss of principal.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

The S&P 500 Index is a market-capitalization-weighted index composed of 500 widely traded stocks chosen for market size, liquidity and industry group representation.

Indexes are unmanaged; do not incur management fees, costs, or expenses; and cannot be invested in directly.

The Consumer Confidence Index is a survey by the Conference Board that measures how optimistic or pessimistic consumers are with respect to the economy in the near future.

The Institute for Supply Management (ISM) Report On Business®, Manufacturing and Non-Manufacturing, are based on surveys of purchasing and supply management executives. The corresponding composite index is based on responses in various categories; a reading below 50 indicates contraction and a reading above 50 indicates expansion.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.