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In my view, the stock market rout in October has been a nasty one. On October 24, the S&P 500 Index and Dow Jones Industrial Average fell into negative territory for the year, while the Nasdaq Composite Index has slipped into a technical correction, down 10% from its recent high.

The market recovered a bit the following day, but the volatility is probably far from over.

What’s behind the carnage?

Nobody has a crystal ball of course.

But analysts point to four trends that may have contributed to the increase volatility and steep market declines since late August.

Peak Earnings

Some Wall Street pros are anxious about the direction of US corporate earnings. According to research firm FactSet, third-quarter earnings are clocking in about 19.5% so far. That’s down from 25%-plus last quarter and the latest fourth-quarter estimates call for even slower profit growth of about 16.5%.

The Tech Sector

The so-called FAANG stocks–Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX) and Google (GOOGL)–have fallen out of favor with some investors in recent months.

Slowing user and revenue growth, as well as data security breaches, have been a concern at Facebook, while Apple may be vulnerable to a slowdown in China.

Interest Rates

The US Federal Reserve has raised interest rates steadily since 2015 and is expected to once again in December.

That in turn is raising the cost of corporate debt, home and auto loans. In fact, some see storm clouds gathering over the massive US real estate market.

Interest rates have been at historically low levels since the financial crisis a decade ago, which helped light a fire under the stock market. No more.

Trade War

The Trump Administration has slapped tariffs on more than $200 billion worth of Chinese goods and Beijing has retaliated in kind.

That’s raised the cost of doing business in China and hurt big American multinationals with supply relationships and market exposure in the world’s biggest economy.

The pain is being felt among big rust belt manufacturers like Ford (F) and Cummins (CMI) and tech companies.

Some big-name manufacturers such as Harley-Davidson (HOG), Whirlpool (WHR), Caterpillar (CAT) and Stanley Black & Decker (SWK) have seen their shares fall more than 20%, in part due to the trade war.

Takeaway

US stock investors have taken a hit this month, with gains being virtually wiped out for the year in the S&P 500 and Dow. While the US economy remains robust and unemployment is at record lows, there’s uncertainty about corporate earnings and interest rates.

In my opinion, investors will need to track these trends and adjust their portfolios accordingly as 2018 winds down.

This material is from Interactive Advisors Asset Management and is being posted with Interactive Advisor Asset Management’s permission. The views expressed in this material are solely those of the author and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

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Xavier Brenner

Xavier Brenner

Xavier Brenner has covered global market, business and economic trends since 2013 for Interactive Advisors, a robo-advisor offering actively and passively managed portfolios and a division of the Interactive Brokers Group.

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