A Wild Ride
Yesterday, we experienced a wild ride in the stock market. The Dow Jones* started the day at 25,300 and ended approximately -1,000 points (-4%) lower, at 24,373. Since its record high on Jan. 26 of 26,617, the Dow was a total of -9% lower as of yesterday.
Here is a summary of some key factors:
At 4%, unemployment is very low, making it tough for employers to hire. Yet, with the recent tax reform that created a lower corporate tax, more employer money will be “chasing” the smaller pool of available employees. This is good for employees in that it may mean higher wages. But, it creates a fear of higher inflation that may lead to a more aggressive Federal Reserve Board action, i.e., higher interest rates, which could then hurt economic growth. Keep in mind, the stock market is always trying to guess what may happen in the future and acts accordingly.
Due to US tax reform and an expectation of high corporate earnings, stocks had priced the economic environment to perfection. In other words, U.S. equity valuations were high. The market was looking overbought, and while timing is impossible to know, this sell-off was coming. We just couldn’t know specifically when.
There is a significant whiff of the recent volatility being “algorithm driven.” This was highlighted when the Dow fell more than -3% in 9 minutes, then recouped its losses, only to drift back to sessions lows to end the day Monday, February 5th. This smells like computer driven rebalancing instead of a fundamental shift.
We don’t think the recent volatility is the beginning of meaningful & sustained weakness for market because the economic backdrop does remain strong. But, it’s possible that this correction could some time to work itself out. And, it is likely that we’ll see more volatility in the future than we saw during the very steady months of 2017.
What do we do next? Since you’ve given a lot of thought to your risk/reward strategy (your allocation to stocks vs. bonds) stay the course on this. Continue to allow us to help you take profits when stocks are overvalued and purchase bargains as they materialize. And, let us know any concerns or questions.
- - -
Dow Jones Industrial Average: The Dow Jones Industrial Average is a composite of 30 stocks spread among a wide variety of industries, such as financial services, industrials, consumer services, technology, health care, oil & gas, consumer goods, telecommunications, and basic materials. The index represents approximately 23.8% of the U.S. market, and is price weighted (component weightings are affected by changes in the stocks’ prices).