Stocks had a rough ride last week, as concerns about rising Treasury yields and a deterioration in U.S.-China trade relations rattled markets. Despite modest rebounds on Friday, the S&P 500® Index and the blue-chip Dow Jones Industrial Average both ended the week about 4% lower. The two indexes are down about 5% for the month so far.
The losses came as 10-year Treasury yields surged to their highest levels since 2011 earlier in the week. (Bond yields generally rise as bond prices fall.) Yields later gave up all of their gains as the stock market started getting rough. Still, the general rise in yields, coupled with concerns about the pace of rising interest rates and inflation, weighed on stocks, reflecting investors’ worries about higher borrowing costs and rising prices potentially eroding corporate profits.
However, the 10-year Treasury yield probably won’t rise much higher, even though the Federal Reserve is widely expected to raise its key short-term interest rate for the eighth time since 2015 at its December meeting, says Collin Martin, fixed income strategist at the Schwab Center for Financial Research.
“Historically, Treasury yields have tended to converge at the rate where the Fed stops [raising rates],” Collin says. “Based on the most recent Federal Open Market Committee projections, the federal funds rate may peak in the 3.25% to 3.5% area, not much higher than current 10-year Treasury yields.”
Meanwhile, trade tensions between the U.S. and China continue, even as they have eased with Mexico and Canada, and fear of a trade war is beginning to take a toll on corporate sentiment and outlooks.
“While tensions over widespread protectionism have faded as talks have been scheduled and some deals have been struck, U.S.-China tensions have escalated,” says Chief Global Investment Strategist Jeffrey Kleintop. “A deal is still possible, but so is escalation. Investors will be watching for any fallout from the tariffs evident in the hard economic data.”
Global investors likely will continue to focus on U.S.-China trade tensions, a potential confrontation between the EU and Italy over its budget and a looming confrontation in the fourth quarter between the EU and UK over Brexit, Jeffrey says.
Chief Investment Strategist Liz Ann Sonders noted that investor sentiment had also been buoyant recently—which is often considered a contrarian indicator. For example, sentiment had recently reached levels of optimism last seen before major U.S. stock indexes dropped roughly 10% in February 2018.
“Less discussed has been the increase in investor sentiment—back toward levels of optimism last seen in advance of the February correction—suggesting investors had become too complacent about the risks to the stock market,” Liz Ann says.
What investors can do
It’s nearly impossible to time the market, and it’s generally healthier for your portfolio if you resist the urge to sell based solely on recent market movements. However, here are some things you might consider doing now:
- Revisit your plan and reacquaint yourself with your investment goals and objectives. If you’re not clear about your goals, this would be a good opportunity to craft a plan.
- Revisit your risk tolerance. Some investors feel differently about their risk tolerance after they experience volatility firsthand. If you’re not comfortable with your risk level, it may be prudent to reduce the overall risk in your portfolio and think about the right level while taking into account both short- and long-term goals.
- Rebalance your portfolio. During periods of volatility, it can make sense to rebalance your portfolio back to its long-term strategic asset allocations. Because U.S. stocks have gained so much in recent years, if you haven’t periodically rebalanced your portfolio—that is, trimmed some positions and added to others to return your portfolio to its target mix—you may be overweight equities and could be exposed to additional risk. Rebalancing regularly can help lower your portfolio risk.
- Talk to us. Schwab is happy to discuss your portfolio whenever and wherever it’s convenient for you. Call us at 800-355-2162, visit a branch or find a consultant.