Market Insight: Your Guide to Navigating the Month Ahead

Geopolitical issues, not data, have been driving the markets. Will it continue? Learn about upcoming market events and what to watch for in May.

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The volatility that surfaced during Q1 spread into the early days of Q2 as investors and analysts tried to absorb the barrage of information about geopolitical issues, including tariffs, potential trade wars, and rising global tensions. Much of the initial news on these issues broke during a lull in economic data, which may have sparked more emotional, headline-driven trading as investors didn’t have other information to help counteract their jitters. That’s no longer the case. Earnings season is ramping up and the initial reports have exceeded expectations, causing volatility to subside a bit. It could be interesting to see how the markets continue to respond if investors are able to tune out the noise and focus on the numbers.

Here are some things to watch to get a more complete picture of market sentiment and what it may mean for your portfolio.

The Three Horsemen of Risk

Gold and bond prices as well as the CBOE Volatility Index (VIX), which measures expected short-term volatility in the S&P 500 Index (SPX), can provide insights into how investors are feeling. A high VIX reading may reflect anxiety about current events, and an extended spike in the prices of gold and 10-year Treasuries may signal a more bearish outlook and the desire for a more defensive position. Note the word “extended,” it’s important to focus on long-term trends, not short-term blips.

As of mid-April, the VIX is higher than at the beginning of the year, but it’s not at an alarming level. And gold has been relatively muted. The bond market has seen pockets of volatility, but for the most part the yield on the 10-year Treasury has been in the 2.7%-2.8% range, which means bond prices are generally holding steady and investors may not be looking to fixed income as a temporary parking place or safe haven. If the three horsemen start to move consistently higher and stay elevated, you may want to revisit, and potentially adjust, your asset allocation.

Evolving Tech Saga

Facebook (FB) has been under the microscope since March when allegations surfaced around the misuse of users’ personal information by a data analytics firm in an attempt to influence the 2016 presidential election. And it has taken fellow FAANG stocks: Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Alphabet (GOOG) as well as other tech stocks on a roller coaster ride. Time will tell if CEO Mark Zuckerberg’s testimony before Congress was enough to allay concerns about the company.

Tech stocks by nature tend to be more volatile than other sectors, and investors should expect the gyrations to continue as the markets weigh investigations into Facebook’s practices and the possibility of legislative action against the earnings reports of tech companies. Apple is scheduled to release its quarterly earnings on May 1.

Despite the increased volatility, the tech sector has been one of the best-performing sectors so far in 2018. However, if you’re concerned about the gyrations, you may want to consider trimming or hedging your positions in this sector. You might also take a look at older tech companies that now seem to act more like blue-chip stocks.

Earnings, Earnings, Earnings

Expectations are high that this may be one of the most robust earnings seasons in awhile. And the season got off to a good start on April 13 when three of the big banks: JP Morgan (JPM), Citigroup (C), and Wells Fargo (WFC) all reported higher than expected earnings. But there’s still a long way to go, and there’s a concern that a certain amount of earnings growth has already been baked into the markets, which means it may be hard for companies to surprise on the upside but easy to disappoint on the downside.

To help put the numbers in context, you may want to listen to CEOs when they discuss their companies’ results (or read the transcripts). Their outlooks on the economy, their businesses, and tariffs may provide clues as to whether a particular industry may be poised for growth or cooling down. Having this information may help you make decisions about the securities in your portfolio.

Home Depot (HD), Walmart (WMT), Target (TGT), and Deere (DE) are all expected to announce their earnings in May, which may provide insights into housing, consumer spending, and manufacturing. However, keep in mind one report doesn’t make a trend. The late winter storms in the Northeast could potentially play a part in these companies’ results.

Jobs, Inflation, and the Federal Reserve

While overall job growth remains positive, the slowdown in March has many investors and analysts looking toward the April numbers, released on May 4, to see if the tide may be turning. Employment barely climbed in March (103,000 jobs) and was the lowest increase since September 2017. However, any figure around 100,000 is probably enough to keep up with population growth.

It’s also generally a good idea to look at wage growth, which was slightly higher in March (2.7% year-over-year). Higher wages are generally a positive thing as it means more money in people’s pockets and potentially the economy. However, it could also be a sign the labor market is tightening, ushering in a more inflationary period.

Any signs of inflation may influence the Federal Reserve’s outlook on the economy and interest rates. The next Federal Open Market Committee meeting is scheduled for May 1-2, just days before the latest jobs report. So we’ll most likely have to wait and see what affect those numbers might have on Fed policy.

Education Over Headlines

It’s hard not to be distracted by all the geopolitical news, but being an informed investor can help you focus on what matters most: long-term trends and the economy. TD Ameritrade offers a variety of online educational resources to help you build your financial literacy. If you’re a TD Ameritrade client, you can log in to your account to access even more tools within the education center.

Or consider attending one of our investor education events:

Finally, check out our media affiliate, the TD Ameritrade Network. It features live programming throughout the trading day, plus a selection of on-demand content. This programming may help you understand how to apply what’s going on in the markets to your personal investment strategy and goals.

Invest Well,

JJ

@TDAJJKinahan

The TD Ameritrade Network is brought to you by TD Ameritrade Media Productions Company. TD Ameritrade Media Productions Company and TD Ameritrade, Inc. are separate but affiliated subsidiaries of TD Ameritrade Holding Corporation.

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