It’s been up and down for U.S. stocks in the past few days, and it has a lot of investors nervous. The stock market has crashed, eliminating significant gains, and then rallied once again on the backs of solid earnings reports. But though many investors are optimistic, Bank of America’s analysts believe the United States may be about to see a period of high volatility.
Bank of America’s analysts predict that this period of high volatility could last a long time — potentially until 2021. The market is particularly vulnerable to this type of volatility because it is being influenced by a multitude of external factors.
Investors are nervous, and it shows. This investor anxiety serves as accelerant and exaggeration for any existing market forces; when the market goes up, investors buy in aggressively. When it goes down, they scurry. Thus, the period of volatility is able to reinforce itself in a cycle.
Further, there is general uncertainty regarding the U.S. trade war with China, as well as the ultimate impact of many of the tariffs that are being enacted across the globe. Some tariffs could have positive effects for industries in the United States, while other tariffs could have long-term negative effects.
The stock market is as emotional as it is technical, and the market tends to move very dramatically when investor faith is shaken. Analyzing the market is presently as much about earnings and company stability as it is about testing investor outlook and investor confidence.
There are specific indicators that tend to align when a bear market is about to occur. These aren’t always completely accurate — they are just signs that have historically indicated that a bear market is upon us. Bank of America believes that 14 out of 19 of their bear market indicators have been triggered. In the past, 100% of these bear market indicators have triggered at the height of the majority of bear markets.
Of course, this isn’t an exact science, but history would indicate that a bear market should occur within the next 21 months. Presently, the market is still bull, and may be bull for some time yet, especially with the increasing levels of volatility that complicate many historical methods of analyzing the market.
To be clear, the American economy is still doing very well — the earnings reports are what have propped up the stock market after its precipitous fall. This has had led analysts to believe that a fall is even more imminent, as the stocks are suffering and stagnating even as the economy improves. Further, some of these increases being seen in earnings may be related to tax benefits that were new this year.
It still remains to be seen what the consequences of the new tariffs will be, and the stock market may very well hinge on that. If the economy struggles due to these new tariffs, the stock market is likely to suffer tremendously as investors panic will be renewed. If the new tariffs prove to have limited impact on the overall earnings of the nation, on the other hand, investors may become more confident in their investments.
For investors, high volatility isn’t necessarily bad; it depends on whether investors are able to take on short-term positions that are advantageous to them. High volatility also doesn’t mean that specific stocks will go down, or that stocks will average losses once the periods of high volatility have ended.
Long-term investors may want to avoid getting into the market now if they expect to retire soon, or otherwise require liquidity in the near future — long-term investors planning to keep their money in for the next few decades, on the other hand, may not be impacted at all. Overall, bull markets and bear markets tend to even out over the course of time, with a trend consistently upwards.
Regards,
Ethan Warrick
Editor
Wealth Authority
