This Was Expected
THIS WAS EXPECTED…
Over the past week, there has been significant volatility in the global financial markets. This volatility continued today as the S&P 500 index fell by 4%. Today’s pullback is part of a larger pullback that has occurred over the past week, as the market has given back all of the strong January 2018 gains. If you’re tuned in to the financial media, you’re hearing hyperbolic terms used such as “bloodbath,” “implosion,” and “worst one day point drop in history,” to name a few. While we understand the financial media’s desire to drive viewership and readers, we would describe what we’re seeing in far more muted (and realistic) terms. We believe what we’re seeing is a healthy market correction that has been due for some time now.
For all of the emotionally charged terms being thrown around by the financial media, the S&P 500 sits at the exact same place as it did on December 8, 2017 (less than two months ago). At the time, we were all celebrating the continued bull market run and the end of a strong year of market performance. If you went to sleep then and woke up today, you’d think that little happened in the past couple of months and likely would not be concerned in the least. It’s important to remember that and to tune out all the media noise.
Let’s take a sober look at the “facts on the ground” and step back from the media hyperbole. The reason thrown about by the media for the market pullbacks on Friday and today is that we’ve seen a spike in the interest rate on the 10-year U.S. Treasury Note. A spike in interest rates increases borrowing costs for businesses and consumers, so the market reacted negatively to such a prospect.
Why did interest rates spike? The reason we’re told is that the monthly jobs report issued last Friday by the U.S. Bureau of Labor Statistics indicated that wage growth was TOO STRONG, leading to fears of inflationary pressures. That’s right. You read that correctly. The jobs report was “too strong.” It was only a few short years ago that the markets would react negatively when jobs data wasn’t strong enough. Now we’re told that the markets are reacting negatively because the jobs data is too strong. We believe that what we’re seeing is merely a return to market normalcy. After an unprecedented 448 DAYS without a 3% pullback in the markets, we would argue that we were overdue to see the pullback that we’re seeing. The markets cannot simply go up, up, up without digesting gains with healthy pullbacks and corrections.
In addition to strong economic data, corporate earnings continue to be strong, as indicated by earnings announcements from a slew of companies on a weekly basis. We also believe that to the extent that the fed moves to increase rates, that would actually be a very positive sign about the Fed's sentiment regarding the overall economy. It signals that the Fed recognizes that the economy is growing at a much more solid clip over the past year than over the previous 8 years and that the fed finally believes the U.S. economy and the financial markets to be healthy enough to digest an interest rate increase. Both of those are long-term positive signs. Recall that over the past few years, the Fed has been hesitant to raise rates because it was uncertain that the markets were strong enough to absorb the rate increases.
To us, all of this data points to healthy long-term prospects for the markets. We would remind all of our clients that their asset allocation plans have been constructed for the long term, built to endure these seasons of normal (and healthy) market volatility.
So our advice to all is to turn off the CNBC, enjoy a quiet evening with your families and your calming beverage of choice, and rest assured that the markets are healthy and behaving normally. Feel free to call with any questions. Have a great evening!
David B. Kearns
Clayton S. Johnson
Dori Riddle
Lauren J. Cantwell