Market Commentary, 02/02/18

This week the stock market finally gave us what many market watchers felt was overdue – a pullback. As of the close today (02/02/2018), the Dow is down 989 points, the S&P 500 is down 79 points and the Nasdaq is down 178 points for the week. As is always the case there are reasons for this week’s decline but bear in mind that an underlying principle is that when the stock market is in an intermediate term (one to five years), bull-market advance like we’ve seen since November 2016, it periodically “looks” for a reason to slow down and catch its breath.

After a 64% advance (S&P 500) from January 2012 to July 2015 (15.2% annual rate of return in those 3½ years), the market was more-or-less flat from August 2015 to October 2016 (the S&P 500 was up just 1.5% in those 15 months). Then, after the November 2016 election, for almost 15 months the market staged a raging bull-run and advanced 33% through last week. That’s a compound rate of return of 2% per month.

Think of it as a race car running full out at 12,000 RPM until it finally pulls over to the side of the road to cool down.

So … filter the reasons and rationales for this week’s market action through the principle above. Those reasons are:

Ironically, the market was whacked really hard, especially today, by positive economic news. Per the just-released monthly employment report, in January 200,000 new jobs were added to the economy compared the 160,000 that were expected and hourly workers had a 2.9% pay increase (compared to January 2017), which is the largest monthly increase in 8½ years. And unemployment, at 4.1% is the lowest in 18 years.

Even though it sounds backwards, the Economy’s good news is the Stock Market’s bad news (temporarily at least) because the economy’s news increased the expectation of higher inflation to the highest level in 3½ years. Some folks think the Fed will raise interest rates next month and in fact, may even raise rates two or three times this year.

This inflation talk led to a sell-off in the US bond market, which caused bond yields (interest rates) to go up slightly. If, When and As longer term rates increase there will be an increased borrowing cost for businesses, which is plenty of reason for the stock market to pull over to the side of the road to cool down and digest the news.

Another big deal is the release of the House Intelligence Committee’s memo regarding abuses involving the Foreign Intelligence Surveillance Act (FISA) during the 2016 presidential campaign. As you know, Republicans are saying one thing, Democrats another but it’s always good to remind ourselves that the stock market is bipartisan … it really isn’t Democrat or Republican and it doesn’t hate one party or the other. But it does hate uncertainty in government, which is what the market perceives at the moment.

A final big deal is that this week’s actions have been the catalyst for many investors to do what investors periodically do – sell and take profits. Today, as the market fell in early trading, profit-takers pushed the market down, which brought in more sellers, which pushed the market down further and so-on.

So … what to do? Nothing. Enjoy the weekend. Eat too many burgers, hot dogs and chips while you watch the Super Bowl.

With client’s money we’ve got stop-loss orders in place in accounts with individual stocks, we’ve got fairly large cash positions and we’ll likely invest some of the cash during this pullback.

Regarding the market, following this week’s sell-off there may be choppiness for a week or two then things may settle down. Basic economic dynamics still indicate a strong stock market and we’ll probably see continued advances through the first quarter and likely until summer.

Sources: Fox Business News and USA Today

Wayne Copelin, CFP®
President, Copelin Financial Advisors, Inc.
514 Brooks Street
Sugar Land, TX 77478
Phone (281) 240-2902
Fax: (281) 240-2856
sugarlandfinancialadvisors.com

Securities offered through ProEquities, Inc., a Registered Broker-Dealer and Member FINRA & SIPC Advisory Services offered through Harvest Investment Services, LLC., a Registered Investment Advisor Copelin Financial Advisors, Inc and Harvest Investment Services, LLC are independent of ProEquities, Inc.