Markets Slide as Bond Yields Rise – Weekly Update

February 5, 2018 | By Steven DiGregorio

After 4 straight weeks of gains, the markets have slipped. As of Friday, the S&P 500 lost 3.85%, the Dow dropped 4.12%, and the NASDAQ decreased by 3.53%. International stocks in the MSCI EAFE also took a 2.78% hit. Domestically, the losses spanned sectors and asset classes. For the S&P 500, all 11 of the index’s industries lost ground last week. This decline came after the S&P 500 had its best January performance in over 20 years.

So, what happened?

Looking at the markets’ sizable losses, you might expect that discouraging economic data came out last week—or some geopolitical drama spooked investors. On the contrary, the drops came in response to news that seems positive on the surface: Job and wage growth are picking up.

Reviewing the Jobs Report
On Friday, the Bureau of Labor Statistics reported that we added 200,000 new jobs in January and beat expectations. Average hourly wages also increased, bringing 2.9% growth in the past 12 months—the largest rise since 2008–2009.

Analyzing the Reaction
When labor data came out, bond yields jumped and 10-year Treasury yields hit their highest level in 4 years. Stocks sank in reaction to these interest rate gains.

Concerns about inflation are fueling this reaction. As wages grow, companies may increase their prices to support their rising labor costs—contributing to an inflationary cycle. With inflation can come rising interest rates.

As a result of this news, some investors became concerned that the Federal Reserve may increase interest rates this year more than initially expected.

Putting the Performance in Perspective
After the unusually calm market environment we experienced in 2017, last week’s declines may feel unsettling. However, price fluctuations are normal and the economy continues to be strong.

In addition, as domestic indexes reach high levels, viewing their declines in terms of points, rather than percentages, can cause unnecessary concern. You may have read reports that the Dow dropped 665.75 points on Friday, contributing to its 6th biggest points decline in history. But even after losing nearly 1100 points in 5 days, the Dow was only down 4.12% for the week and remained up 3.24% for the year.
Of course, every economic environment has risks, and no market can go up forever. We are aware of the risks that increasing inflation and interest rates may bring, and we are here to help you navigate what the future holds.

 

ECONOMIC CALENDAR

Monday: ISM Non-Mfg Index
Tuesday: International Trade
Wednesday: EIA Petroleum Status Report
Thursday: Jobless Claims

 

Notes: All index returns (except S&P 500) exclude reinvested dividends, and the 5-year and 10-year returns are annualized. The total returns for the S&P 500 assume reinvestment of dividends on the last day of the month. This may account for differences between the index returns published on Morningstar.com and the index returns published elsewhere. International performance is represented by the MSCI EAFE Index. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

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Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

Diversification does not guarantee profit nor is it guaranteed to protect assets.

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.

The Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of stocks of technology companies and growth companies.

The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indices from Europe, Australia, and Southeast Asia.

The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

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Past performance does not guarantee future results.

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STEVEN M DIGREGORIO is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC.
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