By: Jim Rambo, Allegheny Research Team
We all got a healthy reminder last week – the stock market and the economy are not the same things. For example, the U.S. Labor Department’s January jobs report was released on February 2, with good economic data. The unemployment rate remained unchanged at 4.1%, a 17-year low, while 200,000 new jobs were added in January 2018. But, the real attention grabber was the 2.9% year-over-year wage growth in January plus December, and November’s wage growth rates were revised upward to 2.7% and 2.5% respectively. This is welcome news for the DOL and the Fed who have both been waiting for this to happen for some time. A quote from the news release read, “This may be the start of a welcome trend in wage gains, and marks the highest percentage increase in average hourly earnings since 2009.”
What was good news for the economy and workers, was taken as bad news for the markets. Why? The fear is that wage growth will lead to higher inflation, and higher inflation will lead to the Fed to raising rates more quickly. The bond market reacted predictably. The 10-year Treasury yield moved up from 2.78% to as high as 2.85% last week. The small uptick in rates pushed the BbgBarc Aggregate Bond Index down -0.10% for the week which is a rational response to the new economic data. However, global equity markets gyrated wildly and ended down significantly for the second week in a row. In fact, the S&P 500 has now given back all of 2018’s gains and then some entering correction territory. A correction is a 10% pullback from a market peak which occurred on January the 26th. Historically, a market correction occurs, on average, about every year. But, the last correction the S&P 500 had was almost exactly two years ago. In fact, we have gone well over a year (404 trading days) without even a 5% pullback, which is a record run of low volatility. And while corrections are uncomfortable for every investor, they are healthy for well-functioning markets in the long-term. While rates going up is a headwind for equity returns, a 10% selloff is not a rational response like we saw from bonds. It’s not 100% clear why the market moved down (and up) so dramatically in such a short period. One thought is some ETFs and hedge funds that bet against volatility were down so dramatically (85%+) that they caused a contagion of selling as they sold other securities to meet margin calls for funds they borrowed.
The mainstream media and many financial news outlets are painting these events in a negative light. However, the important takeaways are that the economy continues to grow, and looks to be gaining momentum. Plus, corrections are normal occurrences in well-functioning markets. Lastly, even when the market is down, you have not lost anything until you sell and lock in those losses.
So, hang in there!
Author: Jim Rambo | Research Team | Allegheny Financial Group | February 2018
The information included herein was obtained from sources which we believe reliable. This report is being provided for informational purposes only. It does not represent any specific investment and is not intended to be an offer of sale of any kind. Past performance is not a guarantee of future results.
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