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What’s Causing Investor Anxiety?

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RANDY FREDERICK: The S&P 500 has just fallen into correction territory for the second time in only two months, sparking renewed fears of further downside. Liz Ann Sonders joins me for this week’s stock market report to talk about why this correction happened so soon after the last one and what will it take to get things back on track.

So, Liz Ann, you and I had actually planned to talk about the upcoming earnings season, but then yesterday the market took a big downturn, and now we find ourselves down 10% from the peaks once again. What is causing so much anxiety among investors right now, and what’s it going to take for things to calm back down?

LIZ ANN SONDERS: Yeah, thanks, Randy, so let me widen the lens initially and say that some of the problems that I think are plaguing the market are a bit longer-term in nature and actually were at the heart of our 2018 outlook, which we’d put out in December, where we had a theme of it’s getting late, and we were referring to where we are in the economic cycle, in an environment where we would expect to see a pickup in inflation, tighter monetary policy, in other words, a little bit more aggressive of Fed, tighter financial conditions, and that tends to usher in an era of more volatility, so I think there’s that overarching problem with which the market is still dealing.

Then we came into the highs in January, and then we developed a sentiment problem. Sentiment got, I would argue, pretty frothy; in fact, many measures of sentiment suggested that investor optimism was at record peak level. That’s enough, sometimes, to cause problems for the market. And then we actually saw a bit of a breakout in inflation and interest rates, and I think that caused the first leg.

Coming out of that first leg, we didn’t quite have the strength and the internal conditions that would suggest we would be off to the races again, and corrections do tend to occur over time; they tend to be a bit of a process. But then of course we had the additional news of the concerns about tariffs and whether we were, instead of just initiating a trade spat, whether it would turn into a trade war. I think that was something the market had difficulty with, and then of course we had the Facebook problem, which led to problems with the social media stocks, and then the specific attack by President Trump on Amazon, and I think that gave us our second leg.

But I wanted to ask you to talk a little bit more about some of the short-term factors, Randy, because you look at the markets… in addition to looking at the news, as we all do, you look at the markets with more of a sort of technical eye, so what did you see in this most recent leg, especially as it relates to what we saw back in February?

RANDY: Yeah, you know, one thing I found that was really interesting is that while it feels like this sort of double-dip correction, if you will, is unusual, the reality is it’s actually not that uncommon at all. In fact, back in August and September of 2015, we saw that happen, and we saw it there again shortly after, in January and February of 2016.

Now I am a bit concerned about sort of the breakdown in technicals, if you will. The S&P 500 has recently broken through its 200-day simple-moving average; the other major market indices are all very, very close to doing the same thing. But as you mentioned, I’m a bit concerned about the breakdown in the tech sector, the FAANG stocks, as you mentioned, Facebook, Apple, Amazon, Netflix, Google, which have been not only leaders in the tech sector, but also all across the market, have really gone into a downturn, and part of that, as you mentioned, is because of the troubles at Facebook and President Trump’s direct attacks on Amazon. We don’t know how that’s all going to play out. I do think eventually this is probably going to end up being another buying opportunity, but I would urge traders to be very cautious this time, because I don’t think it’s over. We need to wait until we see volatility come down a bit, at least a couple of good solid market up days, if not more, but I think when you have a breakdown in technicals, in the end it’s going to take fundamentals to do the heavy lifting here.

So, let’s assume that you and I agree that maybe things don’t get a whole lot better until earning season comes along… now that we’ve had two back-to-back corrections, I think what investors want to know from you, is there any possibility that these corrections could deteriorate further into a full-blown bear market? And if so, what kind of opportunities are out there over the next three quarters?

LIZ ANN: So, a couple things. One, I totally agree that I think earning season is important. Earning seasons are always important, but this one in particular, because we’ve been in this quiet period where companies aren’t able to say much, and then we’ll finally unleash that with calls, and I think their perspective on all this recent news and particularly for many of those stocks that are under most pressure, I think it’s going to be telling.

Now whether this correction turns into a bear market, a couple of statistics on that. The average correction post World War II, if you get to that minus 10%, ends up at about down 15% and tends to last more than 150 calendar days, so we’re not even at the halfway point there. So just based on that we could see a bit more weakness. Now whether it ultimately is sufficient weakness to turn it into a bear market, I think it would more likely be what you could think of as a cyclical bear market or a non-recessionary bear market, because I think the typical recession bear market will be avoided by virtue of the fact that I don’t think there’s much risk of a recession.

But as we often say about the market and investors and behavior, that investing should always be a process over time and never about a moment in time, again, corrections tend to be processes over time, not about a moment in time. And one of the things that we have been reinforcing for investors since we became a bit more cautious last year, is that now is an incredibly important time to make sure you maintain that discipline, you use diversification and rebalancing to your benefit.

RANDY: Yeah, all excellent points, and of course fundamentals are still mostly sound.

Listen, you can get more of our comments in the insights and ideas section on Schwab.com. You can follow Liz Ann on Twitter @LizAnnSonders, and of course you can always follow me on Twitter @RandyAFrederick.

We’ll be back again. Until next time, invest wisely, own your tomorrow.

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