The Fundamentals behind the Technicals
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 02/09/18. Rates and Economic Calendar Data from Bloomberg as of 02/12/18. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
The U.S. stock market experienced its worst week since 2015 as concerns over rising inflation led to a chain reaction of systematic selling. The resulting market moves were some of the most dramatic seen since the Great Financial Crises. For the week, the S&P 500 Index fell 5.1%, the Russell Midcap Index fell 4.8%, and the Russell 2000 Index dropped 4.5%. On the international front, developed markets lost 6.2% while emerging markets gave back 7.1% in U.S. Dollar terms.
The stock market sell-off that began in earnest on Friday February 2, picked up steam last week as the Dow Jones Industrial Average experienced two +1,000 point losses leading to a weekly decline in the benchmark index of 5.1%. To counterbalance these losses were gains of 567 points on Tuesday, 330 points on Friday, and 410 points on this past Monday, February 12. As we discussed last week, it is likely that traders betting on continued low volatility will ultimately be blamed for the pace and severity of this correction. What we are focusing on is (are) the straw (straws) that broke the proverbial camel’s back. A study of market history will reveal that the majority of market inflection points coincide with higher inflation and the combating tighter monetary that often results.
The employment report released Friday, February 2 indicated another strong month of job gains as well as higher than expected wage growth. In prior market updates we’ve suggested that wage growth is the missing component in the inflation equation. Consider that February 2’s employment report came on the back of a solid inflation reading released on Monday, January 29 and higher interest rates throughout the week. From there a logical and well-founded case can be built to tie inflation concerns and higher interest rates to the stock market selloff.
We continue to stress that the backdrop for stocks remains constructive. This is due to the continued environment of global economic growth, corporate profitability, and fiscal spending through reduced taxes and infrastructure. In our view, this correction will be relatively short lived and followed by further (yet more volatile) stock market growth in 2018. While we are optimistic on the market environment over the next twelve months, we are aware that the market will be increasingly sensitive to inflation as the business cycle ages.
Moving forward, investors must have an understanding of their risk tolerance and time horizon. Long term exposure to the stock market will likely continue to reward disciplined investors but we recognize that not everyone has the same investment objectives making a customized approach critical. If you would like to learn more about how we are helping clients position in this environment, please do not hesitate to speak with your Hennion and Walsh Financial Advisor.
Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion & Walsh cannot guarantee the accuracy of said information and cannot be held liable. This information is provided for informational purposes only and is not a solicitation to buy or sell any of the asset classes or sectors discussed.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner’s tax bracket.
The prices of small company and mid cap stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
Investors cannot directly purchase any index.
LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.