The recent turbulence in financial markets is a contrast to what investors have grown accustomed to in a bull market that has lasted more than 10 years, the longest in history.
A hallmark of the past decade has been ultra-low interest rates, which the Federal Reserve used to promote growth in the aftermath of the 2008 financial crisis.
The Fed has been gradually raising interest rates over the past two years, after not having increased them since the recession. Those higher rates have been one catalyst for recent selling.
Market favorites like technology and consumer-focused companies have borne the brunt of the sell-off. Five of the six most valuable US companies recently suffered a correction: Amazon, Microsoft, Alphabet, Berkshire Hathaway and Facebook are all down sharply from their recent highs, although some of those declines began this summer.
The VIX, an index called Wall Street's "fear gauge" because it measures how much volatility traders expect, recently reached its highest level since February.
The current skid for stocks is the third big swoon for the markets this year. The first was a dramatic downturn in late January and early February, when the S&P 500 lost 10 per cent in just nine days as worries about a sharp slowdown in China's economic growth rattled markets around the world. That was followed by a less severe stumble in March.
But more recently stocks had been placid. Between late June and early October, the market didn't rise or fall as much as 1 per cent in a single day. That was similar to the scenario in 2017, when the market drifted higher gradually and finished up 19.4 per cent.
Soaring corporate profits, fueled by sweeping corporate tax cuts, powered the market's recovery this spring and summer. S&P 500 companies delivered second-quarter earnings growth of 25.2 per cent, well ahead of forecasts. That helped send the S&P 500 to a new all-time high in September, erasing the losses from its correction in February.
But now doubts are emerging that a similar surge in earnings growth will rally markets out of their latest skid.
Companies began reporting their results for the third quarter last week. And while earnings growth for S&P 500 companies is expected to be around 22 per cent, according to S&P Global Market Intelligence, some companies are painting a less-than-rosy outlook.
Several big companies, including Amazon, AT&T and Alphabet, have reported earnings or revenue this week that fell short of expectations. And some company executives are warning of rising costs related to the US-China tariffs and inflation.
The absence of a tax-cut boost and the likelihood of higher interest rates, which can raise borrowing costs for businesses, are also giving investors reasons to worry that company earnings growth will slow.
That likely means more volatility for stocks.
"The ability to repeat what we had this year is not going to happen," said Terry DuFrene, global investment specialist at J.P. Morgan Private Bank. "We all agree about that."
- AP
