2/2/18 – Ugly Week for Stocks

We’ve had a great run in the stock market and it’s easy to forget that sometimes stocks go down. That reality came back in full force this week with the Dow down over 600 points today and 4.0% for the week. This was the worst week for the Dow since the first week of 2016, when it was down 6.2%. The S&P 500 was down 3.8%. While this was a rough week, it’s important to put this into perspective: January was the best performing January since 1997, the major indices are still positive for the year and it’s been over 400 tradings days since the S&P 500 experienced a 5% decline, the longest such streak in history. A strong argument can be made that the market was long overdue for a pullback like we’re experiencing. It’s possible this sell-off could continue into next week, but fundamentally, corporate earnings continue to look good, the economy continues to grow and the labor market remains strong. While markets will always fluctuate up and down, the fundamentals suggest to me this pullback is merely that and not a sign of a weakening market or a slowing economy.

One issue that could be driving this weakness is the sharp rise in interest rates we’ve seen recently. The 10-year Treasury is yielding over 2.8% currently, the highest level in over four years. The 10-yr was yielding just over 2.4% at the beginning of the year. Interest rates can tell us many things, including higher expectations for growth and inflation, but it can have some negative impacts on stocks as well. Every investor evaluates various markets and investments and allocates capital accordingly. Rates have been at/near historic lows for many years. Those low yields make bonds much less attractive to many investors. As a result, many portfolios have been skewed to higher equity allocations and lower bond allocations. As rates rise, some investors could decide they prefer the higher interest rates and lower relative risk of investing in bonds. That leads to selling stocks and puts downward pressure on prices.

Oil decreased 1.3% this week to close at $65.26/barrel. The yield on the 10-yr Treasury moved sharply higher, to 2.84% from 2.66% last week. The average rate on a 30-yr fixed rate mortgage moved higher to 4.22% from 4.15% a week ago.

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