Volatility Is the Guest Who Won't Leave

By Victor Zhang - November 20, 2018

Like a holiday guest who doesn't know when it's time to go home, volatility is back and making investors uncomfortable.

In recent trading, investor concern has focused on corporate earnings, particularly technology and tech-related stocks. Combined, the FAANG stocks—Facebook, Amazon, Apple, Netflix and Alphabet (Google)—have lost more than $1 trillion in market value since hitting their 52-week highs earlier this year. The sell-off subsequently spread to energy and consumer stocks, among others.

Investors Are Wary after a Great Run

Bolstered by solid economic growth, low unemployment, contained inflation and the federal tax windfall, U.S. companies have delivered strong earnings growth in 2018. As reporting season winds down, FactSet estimates that third quarter earnings for S&P 500® Index companies will come in 25 percent higher than last year. Further, companies are beating earnings estimates by wider than average margins.

Investors are edgy because the earnings-growth picture gets murkier when they start looking ahead. Year-over-year earnings comparisons will get tougher in 2019 as the impact of the tax cuts wanes, particularly if economic growth begins to slow. According to FactSet, analysts expect double-digit earnings growth for the fourth quarter of 2018, but only single-digit growth for the first half of next year.

Look no further than the recent performance of prominent technology-related companies for examples of the market's anxiety. As shown below, the FAANG stocks, plus technology giant Microsoft, were key drivers of the U.S. stock market's strong performance from the beginning of 2017 through Sept. 30, 2018. Their fortunes turned beginning in October. That's when investors began heading for the exits, worried about the sustainability of the strong corporate and consumer spending that drove those results.

FAANGs + MSFT refer to Facebook, Apple, Amazon, Netflix, Alphabet (Google) and Microsoft. Green bar represents the S&P 500 Index. Blue bar represents the S&P 500 Index with six stocks excluded. Light green bar is the S&P 500 Index with all but the six stocks mentioned excluded from analysis.

Be Prepared for Volatility

Volatility comes with the turf for stock investors. As of Nov. 20, the S&P 500 Index had produced 13 days with moves of 2 percent or greater in 2018. While these bouts of turbulence have been jarring after a long stretch of relative calm, they're not unusual.

Volatile periods such as this remind us of the risk of concentrating your portfolio in FAANG stocks or a narrow style of investing. Rather, we recommend a diversified portfolio that spans asset classes, regions, and investment styles. If you're not comfortable doing this on your own, consider a multi-asset portfolio that's aligned with your goals and tolerance for risk.

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      The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

      Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

      References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.

      Diversification does not assure a profit nor does it protect against loss of principal.