Stock markets lost ground on Friday, driven lower by concerns about a weaker-than-expected November jobs report, pessimism about a rapid resolution of U.S.-China trade friction, and uncertainty about the future pace of Federal Reserve rate hikes.
The S&P 500® index closed down 2.3% on Friday, a closing level that puts the index down 10.16% from its recent high on September 20, 2018. This means the S&P 500 is now in market correction territory, generally considered to be a decline of more than 10% (but less than 20%). The Dow Jones Industrial Average ended the day down 2.2%, and is now down 9.09% from its recent peak on October 3, 2018.
The U.S. economy added 155,000 jobs in November, below expectations, while the unemployment rate remained at 3.7%. This jobs report added to investor concerns that U.S. economic activity may have peaked.
"Not only was job growth slower, unemployment claims have been trending higher for several months, adding to concerns about a peak in overall economic activity, including employment conditions," says Schwab Chief Investment Strategist Liz Ann Sonders.
At the same time, remarks by White House trade adviser Peter Navarro and the recent arrest of the chief financial officer of Chinese telecommunications giant Huawei suggested that a trade deal with China was unlikely to happen soon.
Meanwhile, remarks from several Federal Reserve officials - including Fed Chairman Jerome Powell, New York Fed President John Williams and Fed Governor Lael Brainard - were perceived as relatively hawkish, suggesting that the Fed could keep raising short-term interest rates into 2019.
Ongoing trade and Fed policy uncertainty, along with tighter financial conditions and a stronger dollar, will likely keep volatility elevated, Liz Ann says.
"Our cautious outlook persists, as we see increasing risk of recession heading into 2019 and continued spikes in volatility," Liz Ann says. "Favorable seasonal patterns could provide some support to the stock market in the near term, as could reasonable valuations, but slowing economic growth, trade and monetary policy uncertainty may continue to be offsets."
Upcoming events may keep volatility high
The UK parliament is scheduled to vote on a plan to leave the European Union - the so-called Brexit - on Tuesday, December 11.
"A Brexit deal may not pass the first time, leading to a potentially negative market reaction," says Schwab Chief Global Investment Strategist Jeffrey Kleintop. "But there are 'no deal' scenarios besides an abrupt and disorderly exit from the EU that may have more mild consequences for markets."
The following week, the market's attention will turn to the December 18-19 meeting of the Federal Open Market Committee, the Fed's policymaking arm. A short-term interest rate increase appears likely at this meeting, according to Kathy Jones, Chief Fixed Income Strategist at the Schwab Center for Financial Research.
"We expect the Federal Reserve to take a more cautious approach to rate hikes in 2019," Kathy says. "With global growth slowing, the yield curve flattening, inflation pressures easing, and financial conditions tightening, the Fed may slow or even end its interest rate hikes next year. Policy will be much more dependent on the strength of the incoming growth and inflation data."
Considerations for long-term investors
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.
- Match your portfolio to the time frame of your goals. Make sure your portfolio is appropriate given your goals and objectives. Don't focus only on investments designed to do well over the long-term if you have shorter-term needs.
- Revisit your risk tolerance. Volatility is often a wake-up call for investors who haven't been engaged in their portfolios. If you're not comfortable with your risk level, it may be prudent to dial back the overall risk in your portfolio, while taking into account both short- and long-term goals.
- Consider your investing life stage: If you're near or already in retirement, you may want to review your portfolio and income requirements. If necessary, you may want to adjust your portfolio to help buffer the effects of a market downturn on a portfolio from which you're taking withdrawals for income (or expect to start taking withdrawals soon).