Given the market’s recent activity many investors are wondering if this is simply a pause to refresh, or something more sinister. Could this be the market rolling over into correction, or even worse, bear territory? A correction is typically defined by a 10% drop in prices, whereas a bear market is a decline of 20% or more.
Last week’s 3%-4% drop in stocks was attributed to numerous factors. After an incredible run with unprecedented low volatility, the market is certainly in need of a rest. Can you imagine a thoroughbred racehorse running week after week with no time to rest and recover? The higher markets go without periodic pullbacks, the greater those eventual pullbacks become. Corrections allow earnings to catch up with prices.
What makes the current situation interesting is that the sell-off appears to be a response to improving economic conditions, something most of us welcome. January non-farm payrolls were higher than estimated with gains of 200,000 jobs. Wages posted their biggest increase since the 2009 recession, up 2.9% annually. Longer-term interest rates have been inching up since bottoming in September with the 10-Year US Treasury now at 2.85% compared to 2.05% on 09/07/17. Low interest rates and low inflation are two of the reasons equities have been so attractive.
The FOMC (Federal Open Market Committee) met earlier in the week and had been expected to raise rates. However, out-going President, Janet Yellen felt it was best to refrain from tightening credit and passed that baton on to her successor, Jerome Powell. However, markets rates are independent of the rates manually administered by the Fed and banks. Investors believing that wage increases will finally push inflation up sold bonds and stocks.
So, is the glass half-full or half-empty? It depends on your perspective. Stocks are still not cheap, but fundamentals are strong. Over 80% of the S&P 500 companies that have reported their 4Q-17 earnings have beaten analyst estimates and the accretive impact from the recently passed tax bill is yet in front of us. Interest rates are still at very low historical levels and inflation may or may not be moving up. We shall see.
Disciplined investors with intelligently designed, goals-based plans needn’t worry. The market’s inherent volatility has already been factored into determining their optimal asset allocation policy. Wealthview Capital’s clients understand this value-added proposition and we hope, can sleep more confidently during times of uncertainty.
Sam Taylor, CIMA®, AIF®, CRPC®
Wealthview Capital, LLC