The long, smooth, record-setting ride on Wall Street is over. Investor fears about higher interest rates escalated into rapid, computer generated selling Friday and Monday that brought the S&P 500 down almost 8% from its high on January 26. The Chicago Board Options Exchange VIX index measures stock market volatility. Its long term average level is around 20 and it spent most of last year closer to 10. It is now back up over 30.
Corrections are marked by a 10% drop in value. Below are some interesting facts to keep in mind:
- According to Deutsche Bank, the stock market averages a correction about every 357 days, or once a year.
- Our last correction was nearly 1,000 days ago, the third longest streak on record. It is this streak that has so many observers believing we are due.
- However, you might be curious to know we went 1,800 days without a correction in the mid-1990s. The passage of time alone doesn’t predict a correction.
What should matter much more are the fundamentals. And they remain strong. Last Friday we learned that 200,000 jobs were created in January and the official unemployment rate remains at 4.1%. And average hourly wages grew by 2.9% year-over-year, well above the 2.6% economists had expected. Over the past year we have seen a growing body of anecdotal evidence that revealed upward wage pressures in specific geographies and sectors. Now we are seeing that appear in the official, nationwide averages.
We are also focusing on the following:
- Impact of growing revenues — preceding even the recent tax cuts, corporate managements are indicating that their sales are, and will be, strong because the global economy is strong. There is nothing to suggest this has changed in the last few days.
- The selling could continue, but we think the bottom of this trough will be well short of a bear market, defined as a 20% drop.
- How fast will interest rates and inflation rise — we may see more selling as investor concern grows about how well we can grow in a higher rate environment. We think both will end the year higher than today, but we do not see them becoming unanchored.
Corrections are needed periodically for the long-term health of the stock market. They are unpredictable, but they give investors a chance to see how truly comfortable they are with market risk. It can provide an opportunity for your investment professional management team to add companies at discounted prices and make changes to their portfolio that may be needed.
While it is always more enjoyable to watch the market climb to new highs and see your investment portfolio grow, it is important to remember that markets typically move up and down. We focus on your long-term goals trying to capitalize on short-term fluctuations. Please contact us if you have any questions or concerns, or feel you might need to adjust your investment risk profile. Know that we are always working to help you reach your financial goals.