(written Monday, February 5, 2018)
It appears Punxsutawney Phil saw his shadow and we’ve got 6 more weeks of winter ahead. Similarly, investors are now experiencing a wintertime deep freeze in stock returns. Over the past 6 days stock indices have declined by ~6-7%, erasing gains in the S&P 500 and the Dow for the year.
The S&P 500’s longest streak without a 3% drop has come to an end, and we’re now in the throes of the biggest weekly, and daily, decline since fears of a Chinese slowdown at the start of 2016 sent shivers through global financial markets.
Stocks ended the month of January still near all-time highs. The Dow Jones Industrial Average logged a 5.8% rise in January, while the S&P 500 index climbed 5.6% and the Nasdaq jumped 7.4%.
The stock market’s recent “melt up” performance reminds me of the Greek mythological story of Icarus, who tries to escape Crete by wings made from feathers and wax, but through Icarus’ hubris, he flies too close to the sun, his wings melt, and he tumbles into the sea and drowns.
I don’t think this is an “Icarus” moment, but we have flown too high, too fast. I’m not expecting the stock market to “melt down” much more than we’ve quickly seen, but one can never be certain – a hiccup or major market correction? What we do know presently is that this is the biggest sell-off we’ve witnessed in 2 years. Culprit(s)? Investors adjusting to a surge in global bond yields, for one.
The yield on the 10-year U.S. Treasury note neared 2.85% last Friday, a run-up from 2.06% from last September (a 40% jump). I believe higher yields are reflecting increasing comfort with economic growth (both domestically and internationally) and a bit higher inflation outlook (still near 2% for 2018 and 2019 according to OECD estimates). On the other hand, if you’re a borrower, rate hikes work against you.
As I’ve often stated, the only inflation figure that the Federal Reserve cares about is wage growth and we finally started to get a whiff of inflation there, a +2.9% year-over-year run-up in the January jobs report (reported Feb. 2nd). Maybe it was that 18 states just upped their minimum wages in the New Year that ran wage inflation up?
More than likely this is just a long overdue correction rather than a bear market in the making, as long as bond yields don’t continue on such an abrupt path higher. Otherwise, corporate profits continue to rise, unemployment is near record lows (4.1% U3 BLS figure), and a recession doesn’t appear to be in the offing.
Given the duration of the current bull market’s run (coming upon 9 years in March), it’s OK for investors to feel a bit nervous (hopefully not panicked).
As I’ve stated before – a day or a month does not make a year; and a year, by itself, shouldn’t make you deviate from your long-term objectives.
Market pullbacks are a normal part of the investment cycle. Many traders would say it’s a healthy and much needed pullback.
I know it never feels good to see one’s investment values wane (I’m an investor myself). But in reality, a 6-7% drop is typical, year-in and year-out, in a bull market – a reversion to the mean rather than a precursor of something more severe.
Nobody truly knows where stocks are headed and there is no crystal ball to signal whether this recent multi-session skid points to merely a pause rather than the start of a more extended retreat.
For now the intermediate-to-longer term economic backdrop remains favorable for risk taking.
Personally, I think of this pull-back as one where investors should say “buy” not “bye-bye.” (Everyone’s circumstances are unique so don’t hold this as a rote response appropriate for all, and no advice should be implied).*
A broadly diversified global asset allocation strategy is most likely appropriate for many investors to take advantage of opportunities that may arise and to ride out any storms that may come to pass, domestically or internationally.
However good (or bad) the economic news may be, it’s important to keep a level head. The key to keeping your wealth over the long term is to make solid spending and saving decisions no matter how the markets are doing.
If I can be of assistance, please reach out to me with questions or concerns.
“To succeed in life, you need three things: a wishbone, a backbone and a funny bone.” ~ Reba McEntire