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Client Conversations: With Uncertainty So High, Why Do Markets Keep Climbing?

September 2017

Why have the markets been rising even though many investors are uncertain?

Client Conversations gives financial advisors an easy way to communicate with clients on topics influencing financial markets; it highlights common investor behaviors and offers ways to address the challenges investors face. Share this article with your clients, and remember to follow your firm's policies that govern sharing content with clients and prospects.


Markets have been steadily increasing. This summer, the Dow Jones Industrial Average breaking records began to feel like old hat.

And yet, psychology and real world events are making investors wary. According to a recent poll from the American Association of Individual Investors, 25% of investors are bullish on equities, 13.5% below the historical average.1

But perception is not aligning with reality—markets keep steadily rising. Investors must not let fear of losing keep them from playing the game.

 

The Climb

President Trump’s intentions to change regulations and cut taxes (though not yet realized) have nonetheless stoked the markets.

On top of that, corporate earnings have been high. Through June 30, 2017, 78% of companies in the S&P 500 Index2 have reported positive earnings. Earnings have also exceeded expectations by 4.9%, or 69% above the five-year average of 2.9%.3

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Among the high performers, for example, was tech giant Apple, which came in well above expectations in the second quarter of 2017.4 And earnings for top performers could continue to grow should the promised tax reform be enacted.

Additionally, central banks’ accommodative policies have allowed for slow and steady growth, rather than the rapid growth that preceded the recession about a decade ago. Over the past five years, stock dividend yields and bond yields to maturity have been steady, without many dramatic dips or spikes (FIGURE 1). 

 

Figure 1:

Five Years of Comfortable Dividend Yields and Yields to Maturity for Stocks and Bonds, Respectively

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Source: 10 Year US Treasury Yield, Bloomberg Barclays US Aggregate Bond Index,5 S&P 500 Index | Past Performance is not a guarantee of future results. Indices are unmanaged and not available for direct investment.

 

Not only is the US economy growing, but so are other economies around the globe. For instance, as of August 31, 2017, the MSCI Europe Index6 and MSCI Japan Index7 had total year-to-date returns of 19.49% and 12.29%, respectively.8 For the first time since 2010, world markets are growing in synchronization, bolstering the global economy and boosting projections for global gross domestic product (GDP).

So why are investors uncertain?

 

Psychological Stress

Since the global financial crisis of 2008, many Americans have been wary of the market. They can recall all too readily their losses and anxiety. These scars may be clouding investors’ attitudes in this current market.

The 2008 crisis was due in part to the subprime mortgage market bubble. Now, investors are waiting for the other shoe to drop and the next bubble to burst. Take a look at the headlines. The internet is brimming with articles predicting a doomsday bubble—Bitcoin! Apple! Tech!

And it isn’t all in their heads. Current events play a role in investor uncertainty as well.

 

Geopolitical Questions

President Trump’s actions around policies such as tax reform, healthcare, and infrastructure have created a haze of uncertainty. It’s in this climate that US economic data, such as retail sales and inflation figures, have lagged and the dollar has consequently suffered.

While currency values typically depend upon monetary policy and interest rates, in today’s low-interest rate world, politics may be a greater factor in determining the dollar’s value than they have been historically. The slump in the dollar’s value may be a reflection of a lack of investor confidence.

On top of domestic policy concerns, there is increasing anxiety over the possibility of North Korean aggression as they tested missiles over Japan in late August. News of possible nuclear action from North Korea is also fueling fear and doubt among Americans, possibly exacerbating the economic uncertainty.

The market's continued bull run in the face of such uncertainty proves that sentiment doesn’t drive the market, good old-fashioned steady growth and earnings do.

 

Overcoming Uncertainty

Whether the eight-year strong bull market has a couple more years to run or a correction is on the horizon after all, there is one certainty: A plan is key. Talk with your financial advisor to formulate a plan for navigating changing markets, so that you’re ready no matter which way the course takes you. 

 

Client Conversations gives financial advisors an easy way to communicate with clients on topics influencing financial markets; it highlights common investor behaviors and offers ways to address the challenges investors face. Share this article with your clients, and remember to follow your firm's policies that govern sharing content with clients and prospects.


1American Association of Individual Investors, "AAII Investor Sentiment Survey," 8/30/17

2S&P 500 Index is a market capitalization-weighted price index composed of 500 widely held common stocks.

3Source: FactSet

4New York Times, “Market Surge Meets Dollar’s Swoon,” 8/1/17

5Barclays U.S. Aggregate Bond Index is composed of securities from the Barclays Government/Credit Bond Index, Mortgage-Backed Securities Index, Asset-Backed Securities Index, and Commercial Mortgage-Backed Securities Index.

6MSCI Europe Index is a free-float adjusted market-capitalization-weighted index designed to measure the equity market performance of the developed markets in Europe: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom.

7MSCI Japan Index is a free-float adjusted market-capitalization index designed to measure large- and mid-cap Japanese equity market performance.

8Source: MorningStar

9Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period.

 

All investments are subject to risk, including the possible loss of principal. Mid-cap securities can have greater risk and volatility than large-cap securities. Foreign investments can be riskier and more volatile than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as political and economic developments in foreign countries and regions (e.g., “Brexit”). These risks are generally greater for investments in emerging markets. Small- and mid-cap securities can have greater risk and volatility than large-cap securities. Fixed Income risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall; these risks are currently heightened because interest rates are at, or near, historical lows. Obligations of U.S. Government agencies are supported by varying degrees of credit but are generally not backed by the full faith and credit of the U.S. Government.

This information should not be considered investment advice or a recommendation to buy/sell any security. In addition, it does not take into account the specific investment objectives, tax and financial condition of any specific person. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. This material and/or its contents are current at the time of writing and are subject to change without notice. This material may not be copied, photocopied or duplicated in any form or distributed in whole or in part, for any purpose, without the express written consent of Hartford Funds. 

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