It was a rough week on Wall Street as stocks turned in their worst performance two years. For the week, the Dow fell 4.1%, the S&P lost 3.9%, and Nasdaq was down 3.5%. Bonds remained a big story as their prices fell further and yields rose. Commodities were lower across the board with gold off 1.6%. Oil prices came off their highest level in three years, down 1.6% this week to close at $65.06 per barrel. The international Brent oil moved down to $68.23.
Volatility really picked up this week as stocks sold off strongly, turning in their worst week in two years.
First, the good news. This week we closed out the month of January, which was the best month in 18 months and best January since 1987.
There is an old saying on Wall Street: “As goes January, so goes the year.” It’s called the January Barometer and it suggests that a positive January results in a positive year, and vice-versa. History shows it has been right about 75% of the time, so there may be something to it.
While the month was good, this week was downright rough for investors. Friday alone saw a 2.5% drop on the Dow and was down nearly 700 points at one time – the worst point decline since 2008. Clearly the charts we showed last week of the winning streaks in stocks abruptly came to an end this week (the charts showed it’s been almost 100 days without a 0.6% decline in the S&P and 200 days without back-to-back declines of more than 0.25%).
Bouts of selling like we saw this week are really not that unusual. As those charts suggested, the real anomaly has been the lack of volatility. Stocks have seen remarkable gains and were on the expensive side, so a pullback was not unexpected – although this week’s selloff was stronger than we’d have imagined.
Several of our indicators were severely overbought (expensive), suggesting a pullback was possible:
First, the good news. This week we closed out the month of January, which was the best month in 18 months and best January since 1987.
There is an old saying on Wall Street: “As goes January, so goes the year.” It’s called the January Barometer and it suggests that a positive January results in a positive year, and vice-versa. History shows it has been right about 75% of the time, so there may be something to it.
While the month was good, this week was downright rough for investors. Friday alone saw a 2.5% drop on the Dow and was down nearly 700 points at one time – the worst point decline since 2008. Clearly the charts we showed last week of the winning streaks in stocks abruptly came to an end this week (the charts showed it’s been almost 100 days without a 0.6% decline in the S&P and 200 days without back-to-back declines of more than 0.25%).
Bouts of selling like we saw this week are really not that unusual. As those charts suggested, the real anomaly has been the lack of volatility. Stocks have seen remarkable gains and were on the expensive side, so a pullback was not unexpected – although this week’s selloff was stronger than we’d have imagined.
Several of our indicators were severely overbought (expensive), suggesting a pullback was possible:
What caused the selling we saw this week? There wasn’t (and usually isn’t) one thing we can point to as the culprit. We’ve seen volatility picking up moderately over the last two weeks, so there was a clue investors were getting antsy.
One factor contributing to the selling was a rumor that many large investment funds – like pension funds – would be doing rebalancing this week.
For a little background, a fund may have a 50/50 target allocation between stocks and bonds, but the performance of the stock market may have increased the value of their stock holdings to make the portfolio 60% stocks and 40% bonds. This would require rebalancing, so their stock holdings would have to be sold to get back to that 50/50 allocation. Such a large amount of selling can have an impact on the market.
Another factor for the selloff in stocks would be the rising bond yields. Yields have been rising sharply (so their prices have been falling), and higher bond yields make dividend stocks less attractive. High dividend-paying sectors like utilities and telecoms were hit especially hard this week as a result.
Yet another likely reason for the selloff was better economic news. Yes, good news was bad news. The Fed is slowly pulling back on its stimulus program, which had helped to boost stock prices. An acceleration in economic growth means the Fed may pull back on stimulus even faster, which they alluded to in a policy meeting this week. Less stimulus will also weigh on stock prices.
The week was a busy one for economic data, too. On the positive side, home ownership ticked higher and consumer spending was up. Consumer confidence also rose and remains near the highest level since 2000:
One factor contributing to the selling was a rumor that many large investment funds – like pension funds – would be doing rebalancing this week.
For a little background, a fund may have a 50/50 target allocation between stocks and bonds, but the performance of the stock market may have increased the value of their stock holdings to make the portfolio 60% stocks and 40% bonds. This would require rebalancing, so their stock holdings would have to be sold to get back to that 50/50 allocation. Such a large amount of selling can have an impact on the market.
Another factor for the selloff in stocks would be the rising bond yields. Yields have been rising sharply (so their prices have been falling), and higher bond yields make dividend stocks less attractive. High dividend-paying sectors like utilities and telecoms were hit especially hard this week as a result.
Yet another likely reason for the selloff was better economic news. Yes, good news was bad news. The Fed is slowly pulling back on its stimulus program, which had helped to boost stock prices. An acceleration in economic growth means the Fed may pull back on stimulus even faster, which they alluded to in a policy meeting this week. Less stimulus will also weigh on stock prices.
The week was a busy one for economic data, too. On the positive side, home ownership ticked higher and consumer spending was up. Consumer confidence also rose and remains near the highest level since 2000:
One interesting component of the consumer confidence number was people’s expectations for stock market increases, which stood at an all-time high. This reading was taken last week (before this week’s decline) and as is often the case, when everyone believes something about the market, the opposite usually happens.
The strength of the manufacturing sector ticked slightly lower, but remains within the upper trend we’ve seen since 2016.
Lastly, the always-important monthly employment report came in stronger than expected, with the economy adding 200,000 jobs last month.
On the negative side, productivity declined for the first quarter in two years, which is an important factor for economic growth. Also, people are saving at the lowest level since 2005. These low savings rates often came before economic busts (late 1990’s and mid-2000’s), so this is also a metric to keep an eye on.
Lastly, this week was the busiest one for corporate earnings reports from the fourth quarter. Results have been solid, with Factset reporting a 12% growth for the quarter. Even more impressive has been companies increasing their expectations for the upcoming year, which should be a positive for stocks.
Next Week
Next week will be a fairly quiet one for economic data. We’ll get info on the strength of the service sector and employment. It will be a busy one for corporate earnings, though, as we continue to get a solid amount of corporate info.
Talks of a possible government shutdown are likely to accelerate next week, which is likely to create some volatility.
Investment Strategy
No change here. In the short run, we’ll need to see stocks come off further before committing any new money to broader indexes. We’re upbeat on the market in the longer term, though, as new economic policies will help corporate earnings and the economy in general.
Bond prices have trended lower (and yields higher) the last few months and are now around their lowest level in four years. Buyers have yet to step in here, signaling this may be a shift in the bond market where yields continue to rise. This is good for investors needing more income, but the overall value of the bonds are lower.
As for the rest of the portfolio, bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation. Floating-rate bonds will do well if interest rates eventually do rise.
Some municipal bonds look attractive for the right client, too. We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. We keep a longer term focus with these investments.
Gold is another good hedge for the portfolio. It is only a hedge at this point – rising on geopolitical issues as a flight to safety.
Finally, in international stocks, we prefer developed markets to emerging ones at this time.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
Next Week
Next week will be a fairly quiet one for economic data. We’ll get info on the strength of the service sector and employment. It will be a busy one for corporate earnings, though, as we continue to get a solid amount of corporate info.
Talks of a possible government shutdown are likely to accelerate next week, which is likely to create some volatility.
Investment Strategy
No change here. In the short run, we’ll need to see stocks come off further before committing any new money to broader indexes. We’re upbeat on the market in the longer term, though, as new economic policies will help corporate earnings and the economy in general.
Bond prices have trended lower (and yields higher) the last few months and are now around their lowest level in four years. Buyers have yet to step in here, signaling this may be a shift in the bond market where yields continue to rise. This is good for investors needing more income, but the overall value of the bonds are lower.
As for the rest of the portfolio, bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation. Floating-rate bonds will do well if interest rates eventually do rise.
Some municipal bonds look attractive for the right client, too. We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. We keep a longer term focus with these investments.
Gold is another good hedge for the portfolio. It is only a hedge at this point – rising on geopolitical issues as a flight to safety.
Finally, in international stocks, we prefer developed markets to emerging ones at this time.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
