Wall Street debating whether the market madness that resulted in the first quarterly loss since 2015 is just a short-term blip or a sign of more losses to come.
The broad Standard & Poor’s 500 stock index fell 1.2% in the first quarter of 2018, snapping a nine-quarter stretch of gains.
After racing to 14 record highs through Jan. 26, U.S. stocks were undermined by fears about a trade war and jitters about rising interest rates and the user data privacy crisis engulfing Facebook and other social media companies. There was one glimmer of hope, however: stocks rallied sharply on the final trading day of the month.
So should 401(k) investors be worried?
The Negatives
Let’s start with the bad news.
Stocks could continue to struggle if the trade fight between President Trump and China goes from what is now a tit-for-tat tariff squabble to a full-blown economic war, as that could imperil the global economic recovery.
Tech stocks could also continue their bumpy ride if Facebook and its CEO Mark Zuckerberg can’t contain the fallout from its data scandal and the regulatory scrutiny of social media companies intensifies and new rules are enacted that hurt their profitability. A continued decline in tech shares, an industry group that slid 4% in March, would hurt the broader market because tech now makes up about 25% of the S&P 500.
The “discussion” over user privacy issues on social media platforms “has just begun, with no clear view of what might be enacted or how it will impact business models,” says Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
The Positives
There’s some good news, too.
The stock market is heading into earnings reporting season, and Corporate America is expected to post strong numbers. Wall Street analysts have been aggressively boosting their profit forecasts due to the expected benefits from the big tax cuts businesses received from the new law.
Profits for S&P 500 companies in the first three months of 2018 are forecast to grow 18.5%, up sharply from an earlier estimate of 12.2% on Jan. 1, according to earnings tracker Thomson Reuters.
“Whether or not Friday’s bounce becomes a sustainable rally will largely depend on first-quarter earnings results,” says Jeff Hirsch, editor of the Stock Trader’s Almanac. Traders will also be looking for CEOs to deliver upbeat forecasts for the remainder of the year, he adds.
Another positive working in investors’ favor is that April historically has been a good time to own stocks. It has been the top-performing month for the Dow Jones industrial average in the last 50 years, posting average gains of of 2.04%, according to Bespoke Investment Group.
Even more encouraging is returns in April are even bigger after a decline in the year’s first quarter. The S&P 500’s average return was 2.31% in April in the 10 years since 1983 when the large-company stock index fell in value in the first three months of the year.
Consumer confidence also remains strong, with unemployment low at 4.1% and wages edging higher after years of stagnation. As a result, consumers should continue to spend.
For now, it’s a wait-and-see approach on Wall Street.
“While there is much negativity in the news and in market action this year, we want to encourage patience through what promises to be a tumultuous ride over the next several months,” the Almanac’s Hirsch wrote in his April outlook.
