The S&P 500 Index sank 4.6% in the latest week, the biggest decline since March. In the past three weeks, U.S. stocks have alternated between gains and losses of at least 3%. Not since the height of the financial crisis a decade ago have investors been buffeted by that kind of volatility.
The reasons for the violent swings are numerous but boil down to concern that rising interest rates and the ongoing trade war will throttle global growth and corporate profits.
As investors look to claw back from losses with the deadline for their annual scorecard looming, they are presented with a conundrum on timing. Valuations have fallen to levels last seen in 2016 as prices slumped while corporate profits kept growing. While profits are forecast to grow 9% next year, that estimate could dwindle if the trade war continues to hamstring corporate decision-making.
“It’s really going to come down to the outcome in trade negotiations in future months and probably years, to really understand if this defensive bias is something that will persist or if we will get an opportunity to dip our toes back into some historically cheap markets,” said Andrea DiCenso, vice president and co-portfolio manager at Loomis Sayles. “Problem is, to dip your toes back in, you need momentum to be in your favor.”
The industry is heading for its worst year since 2011 as the S&P 500 has suffered two 10% corrections. The Hedge Fund Research HFRX Equity Hedge Index has lost 6% since January, compared with flat returns in the benchmark index.