US and foreign stocks saw substantial losses again this week despite strong fundamental news. Small company stocks generally had smaller declines. Congress passed a two year budget deal that had large increases in both defense and non-defense spending. Normally, when a deal like this is reached, the markets react favorably and we did see a nice bounce on Friday. However, concerns lingered as to the sharp increase in government borrowing due to tax cuts and increased spending. While inflation has remained stubbornly below the FED’s target, the markets are anticipating increases in inflation over the next couple of years.
I do think we need to put these drops in perspective. While the media likes to grab your attention with headlines like, “biggest point drop ever”, on a percentage basis the declines, while steep, are not that unusual. While we expected volatility to increase in 2018, the sharp declines on Monday and Thursday were accelerated by the unwinding of two hedge strategies. One had to do with shorting the VIX volatility index. Negative VIX exchange trade notes had performed extremely well over the prior 18 months as volatility continued to decline in the extremely low volatility of the markets. Another strategy called risk parity also added to the decline. Risk parity funds try to keep equal volatility from stock, bond and commodities. As the volatility of three segments changed many funds automatically, leading to greater market volatility.
At the end of the day Thursday, the S&P 500 index had fallen 10% from its all-time high in January. 10% is generally considered to be minimum drop to be considered a correction. In the U.S. over the past 85 years we have had a correction on average every 18 months. This week’s stock declines were not accompanied by significant movement into safe haven assets such as bonds, utilities or consumer staples. The 10 year Treasury note yields rose from 2.8 to close to 2.9%. Commodity indexes fell with oil dropping below $60 per barrel following an increase in inventories and news of U.S. production going above 10 million barrels per day. The last time the U.S. produced over 10 million barrels per day was in November 1970. The dollar reversed direction with the dollar index rising above 90.
In the numbers this week:
- The Labor Department reported, first time claims for unemployment fell 33,000 to a seasonally adjusted 221,000 in the prior week. The four week moving average of claims fell 10,000 to a seasonally adjusted 224,500.
- The Energy Information Administration weekly report is here wpsrsummary (3). Also the EIA reported:
- Weekly field production of crude oil increased 332 thousand barrels per day, breaking through the 10 million barrels per day mark.
- Storage of Natural Gas fell 119BN cubic feet.
- The Institute for Supply Management reported its non-manufacturing index was 59.9 in January, up from 56 in December, a strong acceleration.
- According to Baker Hughes, In the past week the number of active oil rigs rose 26 to 790 and the number of active gas rigs rose 3 to 184.
- According to Factset, with 68% of the S&P 500 companies reporting, the blended Q4 earnings growth rate is 14.0%.
Please call us if you have any questions.
Loren C. Rex, CFP®, AIF®, MA Erik A Smith
President Managing Partner
Generations Financial Planning & Wealth Management 269-441-4143
77 E. Michigan Ave, Suite 140
Battle Creek, MI 49017
Carrie Fuce, Assistant 269-441-4091
Toll Free: 800-513-8180
Visit our Website: www.genfinplan.com
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These are the opinions of Loren Rex and Erik Smith and are not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.