Our thoughts on recent market events

Photo of people going up and down stairs to demonstrate market volatility.

One day the market’s up. Then next day, it’s down. Sometimes all that movement happens in a single day. That’s volatility.

As an investor, you may need to expect more bumps in the road than you’ve seen over the last few years.

And that’s not necessarily a bad thing.

You should know that volatility isn’t just markets dropping. Volatility is movement. Markets can, and have, moved down. But volatility means they can move up too.

There are still strong fundamentals in the overall United States economy. Still, US equity markets dropped for a couple of reasons, including:

  • Yields on bonds spiked recently. Some in the market are worried this means interest rate increases could make borrowing more expensive for businesses. That could, in turn, make it difficult for them to grow and expand. In this situation, equity markets typically contract for fear that businesses will face a tougher future.
  • Trade tensions have been rising between the US and many of its trading partners, particularly China. As the US puts new tariffs (taxes on imported items) on goods coming from China, these tariffs can start to make things consumers buy more expensive. Plus, with the global supply networks that many businesses have these days, tariffs imposed by other countries on the US can potentially blow back and affect US products.

What this can mean for investments

The uptick in volatility doesn’t change our commitment to you at Principal®. But as an investor, there are things to keep in mind.

  • Volatility may bring opportunity. Markets can overreact—and sell off more than the economic fundamentals would suggest they should. When markets dip for this reason, you can potentially buy more with the money you invest.
  • The market drops don’t reflect strong US economic growth. Because of this, our economists anticipate some recovery in US stocks through year’s end and into 2019.
  • If clear signs emerge that the US economy is slowing, it might be time to examine your asset allocation and your allocations to US equities.
  • Keep thinking about a broadly diversified portfolio, which may help during volatile periods.

Other articles related to market volatility:

Interest rates up, stock market down

While lots of factors including crowded tech stocks, global growth worries, and quant fund trading explain the stock market drop last week. Find out why we feel like rising rates are the most important driver.

The rate debate: Portfolio strategies for a rising-rate environment

Interest rates are on the rise in the United States and monetary policy is easing globally. Investors are searching for ways to cope. Check out some strategies to deal with rising rates.

Volatility: 3 ways to stay calm when the market is not

Get tips for keeping a cool head and staying on track with your plan for retirement when markets are volatile.

The commentary represents the opinions of Principal Global Investors. It should not be considered investment advice. No forecast based on the opinions expressed can be guaranteed and may be subject to change without notice. No investment strategy, such as diversification, can guarantee profit or protect against loss.

Asset allocation and diversification do not ensure a profit or protect against a loss.

Dollar cost averaging involves continuous investing. Investors need to consider their ability and willingness to continue investing through periods of low price levels. This does not assure a profit nor protect against loss in declining markets.

This document is intended to be educational in nature and is not intended to be taken as a recommendation.

Insurance products and plan administrative services provided through Principal Life Insurance Co. Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc. Securities offered through Principal Securities, Inc., 800-547-7754, member SIPC and/or independent broker-dealers. Principal Life, Principal Funds Distributor, Inc. and Principal Securities are members of the Principal Financial Group®, Des Moines, IA 50392. Principal Global Investors leads global asset management and is a member of the Principal Financial Group®.