February 2018 stock market volatility: Four questions answered
Stock market volatility has ruled the headlines since last Friday. There has been a lot of noise around this activity, and with that comes many questions. The following is our perspective, which will address key questions many of you are asking.
What is (and isn’t) causing the February 2018 stock market volatility?
We do not think the February 2018 stock market volatility and stock market decline as an indicator of deteriorating fundamentals. Synchronized economic global growth continues. The fundamentals remain intact, therefore corporate earnings will be robust in 2018, and that should support stock prices. We believe the decline represents a return of volatility and is a normal market correction.
What are some of the factors?
Several factors play into the recent pullback:
- The good news has become the bad news. Friday’s employment report suggested a vibrant economy and that will lead to inflation. Average hourly earnings moved up from 2.5 percent to 2.9 percent – the highest level since 2009. Typically, rising inflation leads to higher interest rates.
- Too far, too fast. The S&P 500 was up 5.7 percent in January, an annualized rate of 94 percent, which is unsustainable.
- The correction cometh. We haven’t seen a five percent correction in over 80 weeks. Historically, we see a five percent correction every 10 weeks.
Where are we now?
We have now seen a seven percent pullback in the S&P 500.
What is expected going forward?
Again, we think the February 2018 stock market volatility and pullback represents a normal market correction, as the market needs to work off some excess optimism. We do not believe this is the start of a bear market. Bear markets are associated with recessions. We think better-than-expected earnings reports over the next two weeks – combined with a slower pace of interest rate increases – should stabilize the markets.
As always, we will continue to monitor the activity and provide updates as appropriate.
Be sure to listen to our Q4 2017 economic webinar for more perspectives on US economic drivers and indicators.