The Best Indicator May Be a Long Way From Signaling the Start of a Bear Market

May 12th Weekly Market Update

While stocks were relatively unchanged for the week of May 5 – 9, 2014, daily and intra-day volatility has been notable — the S&P 500 saw 1% intraday moves on Tuesday, Wednesday, and Thursday. The stock market volatility of the past few weeks seemed to shake the nerves of individual investors leading to a week of net outflows from funds that invest in U.S. stocks after seeing net inflows in five of the past six months, according to data from ICI.

The volatility we call “market storms” is likely to continue to be a characteristic of markets this year, caused by well-known factors, such as: geopolitical conflict in Russian border countries, slower economic growth in China, or a weak start to the year for the U.S. economy, among others, but also lesser-known factors like the Oklahoma earthquakes, solar flares  disrupting communications, and the Ebola outbreak. So, while ongoing volatility with pullbacks of 5% or more is likely, a bear market — defined by a decline of 20% or more — is very unlikely in 2014. A key basis for our high degree of confidence in this forecast is an indicator with a flawless track record over the past 50 years: the yield curve.

Market participants have become worried about when the Federal Reserve (Fed) may start to hike short-term interest rates. Many market participants expect the Fed to begin rate hikes next year.

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