The Weeks We’ve Had
Published On: March 26, 2018
Written by: Ben Atwater and Matt Malick
By the end of trading Friday, the Standard and Poor’s 500 Index experienced, for the second time this year, a weekly drop of 5%. Prior to February, the S&P hadn’t fallen 5% since January 2016 and now we’ve experienced it in back-to-back months.
The S&P 500 closed Friday just above its 200-day moving average and just above its February 8th low. That likely isn’t a coincidence. In other words, traders haven’t been willing to break the back of the market yet.
In the very short-term, if tech stocks, specifically Amazon and Netflix, start to deteriorate, the risk of a serious market decline increases exponentially. These kinds of stocks have been the leadership of the bull market and if they falter, it’s a major negative.
From January 26th to February 8th, the S&P 500 declined 10.1%, meeting the definition of a market correction. As we’ve already mentioned, stocks are now testing that February 8th low, but this may still end up being just a run-of-the-mill correction.
However, the narrative has changed in 2018. As we wrote to you on December 19, 2017 in Thinking About 2018, a changing narrative was a risk coming into this year.
Last year the talk was about major corporate tax cuts, deregulation, continued low interest rates, the infallibility of certain business models and coordinated global growth. More recently, the talk has been about inflation, higher interest rates, a slowdown in Europe, a trade war and internet privacy.
The first 5% down week, the one in February, was attributable to fear of inflation and higher interest rates. Last week’s 5% move was about a potential trade war.
The talk of a trade war belies what we believe are the real and fundamental problems with the market. In our view, the trade war narrative won’t usher in a bear market. Instead, the real market risks are historically high equity valuations, forecasted economic growth that doesn’t materialize, surging federal debt and central bank tightening. Most of this has not yet entered the market’s psychology.
Regardless of what happens next week, next month or next year, we are long-term investors who manage money exclusively to help you reach your goals. The market provides us with constant surprises and offers the opportunity for considerable commentary, but ultimately in your accounts, we follow a discipline that will serve you well over many years. This means we won’t get carried away with excessive pessimism or optimism, rather we’ll chart a long and steady course.
Please visit www.atwatermalick.com/ria for full disclosure materials related to recommendations contained in this update.
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