Insights into key market performance and economic trends from Dan Kemp, Morningstar’s global chief research and investment officer.
In a week when political violence returned to the US, investors faced with uncertainty are likely to seek narratives that provide a guide to the future and then express these through portfolio changes. This can lead to volatility in asset prices and risk investors being ‘whip-sawed’ as prices first overshoot in one direction and then another. So it is important to remember the old investing motto ‘don’t just do something, stand there’. The most important thing investors can do is stick to the plan and avoid reacting.
Expect Volatility This Week
Occasionally unusual opportunities can emerge in these situations – such as the fall in Japanese equities in the wake of the Brexit vote in the UK – which can increase returns for those investors prepared to take a long-term, valuation-driven approach. However, most investors are likely to be best served by doing as little as possible.
The events over the weekend were not reflected in the market prices at the end of the trading week which was dominated by news of falling inflation and stronger-than-expected profit growth from US companies reporting at the start of the earnings season.
Small-Cap Stocks Recover
Within the US markets, the recent trend of large company leadership was reversed with the Morningstar US Small Cap index rising 4.62% over the week while the Morningstar US Mid Cap index rose 3.05% and the Morningstar US Large Cap index rose only 0.36%. Despite this surge in prices last week, Morningstar’s equity analysts continue to see significant value within small and mid-size companies. To find out more about this team’s views, you can access the Q3 US Stock Market outlook here.
Rate Cut Hopes Increase
Optimism among investors was supported by lower-than-expected inflation data with both the headline and core Consumer Price Index lower than expected. Headline prices actually fell in June by 0.1%. This naturally raised expectations of a cut in interest rates with the probability of at least two interest rate cuts by the end of the year rising to 92.9% from 76.4% a week earlier, according to CME Fed Watch.
US Banks Starts Earnings Season Well
At an industry level, banks were especially strong with the Morningstar US Banks index rising 2.10%. Formally unpopular US Regional banks rose even faster with a gain of 7.42% in the Morningstar US Regional Banks index. Alongside optimism on interest rates, this also reflects a strong start to the quarterly US earnings season for the banks last week. You can catch up on all the latest earnings reports as well as the expectations of Morningstar’s equity analysts here.
A Noisy Week of Data and Earnings
While investors’ focus is likely to be on politics this week, there are also numerous data releases that will provide an indication of the health of the US economy alongside speeches by Jerome Powell and other Fed officials. At a company level, the earnings season moves up a gear with further releases from financial services firms and the earlier reports from the healthcare sector. Consequently, it is likely to be a very noisy week for investors and a reminder of the importance of having a long term plan and strategy.
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