Weekly Economic Summary - 2/12/2018Submitted by Miller Financial Group, LLC on February 12th, 2018
Stocks are recovering this morning, after a brutal selloff last week that ushered in new levels of volatility that market participants haven’t seen in some time. The Dow Jones Industrial Average finished last week with losses of -5.2% in a week that saw two 1,000 point drops and six consecutive days of 500 point intraday swings. The selloff was broad in nature, with losses exceeding 5% on the S&P500 and Nasdaq as well as most international markets.
Selling pressure started on Friday, February 2nd after the Labor Department’s strong jobs report stoked fears of inflationary pressure and rising interest rates. The 10 yr. treasury yield finished the week at 2.86% after knocking on the door of 2.90% all week. The underlying strength of the economy has not changed, only added concerns that the return to an inflationary environment might send the Federal Reserve on a more aggressive path toward interest rate hikes, putting the brakes on the stock market.
Last week’s stock market correction, was not a surprise for most investors. In fact, in our January Quarterly Market Letter we wrote that we expected a 10% correction in 2018. What caught investors by surprise however, was the speed at which this correction occurred. Many are attributing the brutal pace of last week’s selloff to added selling from margin calls on a handful of leveraged ‘volatility’ products owned by hedge funds that got squeezed last week.
Whatever the case, last week’s correction was overdue. To put into perspective how fast the market has risen, last week’s correction brings us back to levels seen in early December just before Congress’ tax plan was announced. We’re also coming off the longest stretch in stock market history without a single 3% decline.
Stock market corrections are a normal ‘par for the course’ in investing. It’s the risk in volatile equity markets that allows for the ‘risk premium’ to be paid to patient, long-term investors. Although last week’s pullback was fierce and uncomfortable, historically it was to be expected. Here’s a few facts to drive home how normal these events are:
- Since the bull market began in 2009 there have been four 10% corrections (low when you consider that historically markets average one -14% decline annually).
- Nearly every 5 years, the markets experience a 30% decline.
- Daily declines of 2% or more occur on average 5 times per year.
- Since 2009, there have been 24 declines of 5% or more.
Although we’re only a week into this pullback and there’s a chance that volatility could stick around in the coming days and weeks, we feel confident that the underlying fundamentals of the market will lead to higher results in the future and that market downturns can present opportunities to add to long-term investments. With corporate earnings expected to grow a whopping 18% in 2018 there’s reason to believe the market could end 2018 with gains.
Stay patient, disciplined and focused on the long-term and give us a call if you’d like to schedule a review your portfolio allocation, risk tolerance and financial plan.
Have a great week!