-By Mark Martiak
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Up until February 12th, the stock market during the month of February was considerably wild. With the recent sell-off and spike in volatility, what does that mean for the rest of the year?
First Quarter Happenings
U.S. stocks fell sharply on Monday February 5th, as the S&P 500 slumped over 5% for its largest weekly slide since January 2016, ending a record stretch of extremely low volatility. Investors’ inflation fears were the primary catalyst for the sell-off that week. The S&P 500 hasn’t experienced a 5% drop since the U.K. voted to leave the European Union in June 2016, and since then it has had an uninterrupted period of 588 days without a 5% decline. The index’s plunge in February pushed the CBOE VIX Volatility Index up 116%, the sharpest increase ever. At one point, the S&P 500 fell as much as 12% from its January 26 all-time high, sending the benchmark index into correction status, but a Friday rebound trimmed its drop from the peak to 8.73%. Also of note is the yield on 10-year Treasury notes reached as high at 2.90%, a fresh four-year high1.
In key economic news, the Institute of Supply Management’s (ISM) non-manufacturing (service sectors) activity index jumped from 56 to 59.9 in January, the fastest pace of service industries growth in at least a decade2. The U.S. trade deficit widened by 5.3% in December to -$53.1B, its highest gap since 2008, as imports rose 2.5% to a record $256.5B, and exports increased 1.8% to $203.4B. Jobless claims fell by 9,000 the week prior down to 221,000–its lowest level in nearly 45 years. Lastly, the final December reading of wholesale inventories rose by 0.4%, topping estimates for a 0.2% rise and follows a 0.2% November increase.
According to Cleveland Federal Reserve president Loretta Mester, the recent turbulence in the financial markets will not damage the economy’s overall strong prospects3. Before the recent downs there was a record-setting run, and “for now, I expect the economy will work through this episode of market turbulence and I have not changed my outlook. In my view, the underlying fundamentals supporting the economy are very sound.” As of now policy should tighten at a pace “similar to last year’s,” when the Fed raised rates three times. Forecasters see the U.S. economy gathering steam this year and the Federal Reserve raising short-term interest rates three or perhaps four times by the end of 2018.
Despite the recent market turmoil, economists surveyed by The Wall Street Journal have predicted that the U.S. gross domestic product would rise 2.8% in 2018, accelerating from 2.5% growth in Q4 of 2017. This prediction is supported by the recent package of tax-code changes. Economists also believe the unemployment rate will fall below 4% by midyear. The latest survey was conducted Feb. 2nd-6th, after the release of the January jobs report and during a period of stock-market volatility4. Of these economists, nearly two-thirds said they saw more risk that the economy would grow faster than it would grow more slowly–another sign of optimism about the outlook.
The market was undervalued when the correction started in February, and it was even more undervalued after it happened. Now rising inflation data has some worried the correction isn’t over, and that higher interest rates will be a big negative for stocks. It’s true rising rates reduce the markets fair value, but we’re still a long way from the danger zone.
Corrections are funny things. Investors and institutions can get scared or shaken, and sometimes those violent pullbacks can lead to a sustained downturn. I don’t think that’s the case now, however. Obviously, the risk of rising interest rates was a culprit, but I think fundamentals will rule the day and that the recovery from extreme volatility is sustainable. We’ll definitely see more volatility, but I don’t think it’ll be as abrupt or violent as what we saw, and as far as inflation goes, we’re still a long way from the danger point, before corporate earnings are impacted.
The bottom line is that stocks are still cheap and fundamentals rule the day.
Mark Martiak can be seen offering his financial commentary and views on CNBC CLOSING BELL, FOX BUSINESS NETWORK and YAHOO! FINANCE. Mark can be heard on his weekly podcast: MARTIAK MARKET UPDATE – available at: https://markmartiak.com Mark Martiak is a Senior Wealth Strategist at Premier Wealth Advisors LLC in New York and a registered investment advisor with First Allied Securities Inc. Securities offered through First Allied Securities, Inc., A Registered Broker/Dealer. Member FINRA/SIPC. Advisory services offered through: Premier Wealth Advisors, LLC. (PWA) & First Allied Advisory Services, Inc. (FAAS). PWA & FAAS are not related entities.
1. Economists Stick With Optimistic U.S. Outlook Despite Market Turmoil. Forecasters surveyed by The Wall Street Journal see the Fed raising rates at least three times in 2018. The Wall Street Journal – By David Harrison and Ben Leubsdorf. Updated Feb. 8, 2018 10:02 a.m. ET
2. U.S. Service Industries Expand by Most in at Least 10 Years. By Katia Dmitrieva and Sho Chandra of Bloomberg Markets. February 5, 2018, 10:00 AM EST Updated on February 5, 2018, 10:38 AM EST
3. Views on the Economy and Monetary Policy. 02.13.18 Loretta J. Mester Government Affairs Breakfast Series, Dayton Area Chamber of Commerce, Dayton, OH. https://www.clevelandfed.org/newsroom-and-events/speeches.aspx
4. The Wall Street Journal The U.S. economy added a better-than-expected 200,000 jobs in January, the Labor Department said. The unemployment rate held steady at 4.1%, its lowest level since December 2000.