The markets started 2018 with the wind in their sails, and investors watched as indexes continued their nearly straight-up trajectory from 2017.
Then, after the S&P 500’s best January performance since 1997, stocks took a dive at the beginning of February.[i] On Monday, February 5, the Dow and S&P 500 each lost more than 4%, and the NASDAQ’s drop was nearly as significant.[ii] The next day, all 3 indexes posted positive returns.[iii]
We understand how unnerving these fluctuations can feel—especially as headlines shout fear-inducing statistics. Our goal is to help you better understand where the markets stand today and how to apply this knowledge to your own financial life.
Putting Performance Into Perspective
When markets post dramatic losses or whipsaw back and forth, many people wonder what causes the turbulence—and may assume negative financial data is to blame. However, the recent selloff and volatility don’t have the culprits you might expect.
No negative economic update or geopolitical drama emerged to spur the selloff February 5–6. Instead, emotion-driven investing may have combined with computer-generated trading to fuel the decline. In particular, after the latest labor report showed wage growth picking up more than expected, some investors began to worry about increasing inflation.[iv] Higher wages can mean companies have to raise their prices to support their labor costs, a cycle that can cause inflation to grow.[v]
While concerns about inflation and interest rates may be to blame for the market fluctuations, it may not be the only detail to focus on. Another key point is important to remember as an investor: Volatility is normal.
Knowing Where to Go From Here
Over short periods of time, the market trades on fear, anxiety, greed, and emotion. Over the long-term, however, economic fundamentals drive the markets.
Thankfully, a variety of data indicate that the economy continues to grow:
- Labor Market: The economy added 200,000 new jobs in January and beat expectations. Average hourly wages also increased, bringing 2.9% growth in the past 12 months—the largest rise since 2008–2009.[xiii]
- Corporate Earnings: The majority of S&P 500 companies who have reported their 4th quarter results have beaten their earnings estimates.[xiv]
- Service Sector: The latest reading of the ISM Non-Manufacturing Index (which tracks performance and expectations for service-sector businesses) hit its best level since 2005.[xv]
- Consumers: The most recent data indicates that personal income and spending are on the rise.[xvi]
As investors try to determine whether inflation is on the rise and higher interest rates are imminent, volatility could continue. After last year’s smooth sailing in the markets, these fluctuations may feel harder to withstand. The reality is that equities don’t move in a straight line.
Even if volatility is here to stay, we know that price changes can provide new market opportunities. We agree with the economists at First Trust who assert that, “More economic growth will ultimately be a tailwind for equities, not a headwind.”[xvii]
We encourage you to focus on your long-term goals, rather than short-term fluctuations. As you do, avoid allowing emotions to derail your plans. We also want you to feel comfortable in your financial journey. If your thoughts on risk have changed, call us so we can help you find the best path forward.
As always, we are here to provide you with clarity, perspective, and support during every market environment. Thank you for the confidence you place in our abilities. We consider it a privilege to be good stewards of the assets you entrust to our care.
Valenta Capital Management
[vi] First Trust, Staying the Course, 12/31/17
[x] First Trust, S&P 500 Performance After Its Worst Days, 6/17
[xi] First Trust, S&P 500 Performance After Its Worst Days, 6/17
[xii] First Trust, S&P 500 Performance After Its Worst Days, 6/17
Registered Representative, Securities offered through Cambridge Investment Research, Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, a Registered Investment Advisor. Valenta Capital Management and Cambridge are not affiliated.
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