The Snooze-Button Stock Market | Morningstar

Here are two words investors may have encountered a fair amount in the last couple weeks when it comes to the stock market’s performance: rout and roil. As in “the biggest rout on Wall Street in months” and “volatility continued to roil financial markets.”

We can add another word starting with “r” that investors should always consider: “reality.” Such as, “In reality, what have the markets been up to?”

This should be a go-to question for investors at any point. The reality check starts by looking at the context of “where” markets have been and a broad understanding of “why.” 

From there, investors can begin to see whether recent swings in the market are a wakeup call that warrants a response or whether they should just hit the snooze button.

Lets start with “where” and look at the numbers.

As this column is being written on Monday, U.S. stocks are in the red, having posted broad-based declines in September. Last month, the Morningstar U.S. Market Index lost 3.5%.

Here’s a look at the performance of U.S. stocks broken out by market cap and style. The red for September reflects the widespread sell-off. But investors should consider where markets have been beyond just the past month. For the past 12 months, it’s a sea of deep green. So far in 2021, the Morningstar U.S. Market Index is up 15%, which comes on top of a 20.9% return in 2020. Those are meaningful gains.

Before going deeper into the market’s performance, it’s worth looking at the “why,” with an eye toward weighing whether there has been news that materially changed the economic outlook, which could suggest that the market’s downleg could have some meaning.

Some pundits have flagged it as bad news for stocks that the Federal Reserve signaled last month it could raise interest rates somewhat sooner than expected in 2022 in response to rising inflation pressures. Was this a game-changer? Given that monetary policy was still in economic-emergency mode against the backdrop of a recovering economy and rising inflation, most Fed-watchers weren’t surprised. Most also believe that the Fed learned its lesson about roiling the markets (there’s that word again) from the 2013 taper tantrum and will continue to be deliberate and transparent in its moves away from easy money. (Morningstar’s economic outlook centers on continued healthy economic growth and only a temporary rise in inflation.)

What about other issues like those outlined here, ranging from jitters about the regulatory crackdown and Evergrande Group in China, to snarls in global production and shipping that are affecting a host of major industries. These are important to be sure, but are they trend-changing?

Stocks remain slightly overvalued according to Morningstar’s valuation metrics. Valuations do matter over the long run and can make the market more vulnerable to steep declines.

But with interest rates expected to remain relatively low even once the Fed begins tightening monetary…