On Monday, the S&P 500 Index dropped 2.4% amid threats of higher tariffs on all Chinese imports and retaliatory measures from China. The index now sits 4.6% from all-time highs reached two weeks ago.
While it has been a turbulent May for investors, we think current concerns on tariff impacts could be overblown. It’s still possible the full implementation of tariffs may not materialize since it appears the bulk of the agreement is already in place. We continue to project gross domestic product (GDP) growth of 2.5% in 2019, but if the worst-case scenario were to materialize, we suspect it would deduct 0.5% from our forecast. In that worst-case scenario, GDP growth would be closer to 2% this year, largely consistent with the average pace over the last decade. The impact of tariffs on U.S. company earnings may also not be as severe as feared.
“We encourage investors to remember that the S&P 500 just reached record levels April 30 after a significant run from the market lows late last year,” said LPL Research Chief Investment Strategist John Lynch. “We still see solid GDP growth, an accomodative Federal Reserve (Fed), a tightening labor market, and profits beating lowered expectations. Given this backdrop, we struggle to view this experience—unpleasant as it may be—as resulting in anything other than your typical 6–10% pullback.“
We’ve also expected some weakness in U.S. stocks. In late March, we shifted to a more cautious market weight stance on equities in preparation for a near-term pullback. Our recent Weekly Market Commentaries have highlighted stocks’ swift rally year to date and the potential for midyear volatility given seasonality and unresolved global issues. The S&P 500 has been unusually calm so far this year, as LPL highlighted in this week’s Deal or No Deal. On average and based on data since 1950, the S&P 500 has endured an 8.5% pullback in the first five months of a year.
Stocks have also been more prone to weakness after a strong first quarter, as we explained in our March 29 blog. Since 1950, after climbing at least 10% in the first quarter, stocks have gained another 6% in the final three quarters. However, before realizing these gains, investors had to endure an average pullback of 8.9%.
Fortunately, stocks have generally done well after reaching new highs, particularly after a long period without one. Since 1950, the S&P 500 has climbed an average of 12.9% in the 12 months after snapping a drought in record highs of at least six months, according to our April 24 blog.
While volatility can be uncomfortable, it may also provide opportunities for suitable investors to rebalance, diversify portfolios toward targeted allocations, or to add to equity positions based on what we see as a generally favorable macroeconomic environment. Ultimately, we think earnings growth and solid fundamentals could drive the S&P 500 to new highs later this year.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.
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