The past weeks have seen significant volatility in the U.S. stock markets which can cause uncertainty among investors. In fact, Yahoo Finance states in the first six weeks of 2015 the S&P 500 has experienced three loss/gain cycles of between 2.5% and 3%. With all that volatility, as of February 9th, the S&P 500 is down 0.59% year to date.
At the beginning of this year our forecast, along with LPL Financial Research, was estimating a positive market of 5% to 9% total returns for the S&P 500 in 2015. However, we were keen to also forecast increased volatility than we have experienced in the past few years. It appears that at least the volatility prediction is coming true.
Why has the market turned volatile?
Is it the U.S. and European standoff with Russia over Ukraine? Is it the battle between the European Union and Greece over new political resistance to Greek austerity? Is it because of the uncertainty of falling world oil prices and the resulting financial impact on the energy industry? Or perhaps the uncertainty of when the Federal Reserve will increase interest rates and what effect that will have on the U.S. markets?
While all these issues have the ability to create market “noise” for a day or more based on the latest news, it is our opinion they are all minor factors contributing to the recent volatility. We believe the most important factors affecting the markets are corporate earnings and the future outlook for the U.S. economy.
In regards to corporate earnings; we are at the peak of earnings season. Per Factset Inc., as of February 9, more than 300 of the S&P 500 companies have reported earnings for fourth quarter 2014. The reporting season began with wide swings of good and bad news from company to company. With U.S. stock prices trading at historically rich prices, (per the Wall Street Journal February 9th, 20 times reported earnings for the S&P 500), it doesn’t take many companies reporting disappointing results before markets begin to sell off that day. However, after more than 300 companies reporting earnings, the collective companies have increased income 3% (FactSet Inc.). LPL Financial Research forecasts the S&P 500’s corporate earnings per share (EPS) growth to be 5% to 10% for 2015*.
At current stock prices, and with all the “noise” from world events, the markets from time to time will doubt the corporate income forecasts, causing volatility. We will continue to see this, but just as winter ultimately gives way to spring, we believe the markets will begin to realize 2015 will be a positive year for investors.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Investing involves risk including loss of principal.