After months of relative calm, market fluctuations are causing many investors to wonder what is happening to the economy. Last week, the S&P 500 lost 5.16%, the Dow dropped 5.21%, and the NASDAQ declined 5.06%. The MSCI EAFE also gave back 6.19%. These losses pushed all four indexes into negative territory for the year.[i] In addition, the weekly performance included significant volatility, as stocks had large fluctuations both within days and from one day to the next. The Dow, for example, lost over 1,000 points twice during the week—and also twice gained over 300 points.[ii]
During times like these, viewing events in their proper context is imperative. This week, we are going beyond our typical market update in an effort to provide you with clarity and perspective.
Our Analysis of the Recent Market Turbulence
The markets started 2018 with the wind in their sails, and investors watched as indexes continued their nearly straight-up trajectory from 2017. Then, after the S&P 500’s best January performance since 1997, stocks took a dive at the beginning of February.[iii] On Monday, February 5, the Dow and S&P 500 each lost more than 4%, and the NASDAQ’s drop was nearly as significant.[iv] The next day, all 3 indexes posted positive returns.[v] The volatility continued throughout the week. On Friday, February 9, the indexes recovered some of their losses, but each still ended the week down more than 5%.[vi]
We understand how unnerving these fluctuations can feel—especially as headlines shout fear-inducing statistics. Our goal is to help you better understand where the markets stand today and how to apply this knowledge to your own financial life.
Putting Performance Into Perspective
When markets post dramatic losses or whipsaw back and forth, many people wonder what causes the turbulence and may assume negative financial data is to blame. However, the recent selloff and volatility don’t have the culprits you might expect.
No negative economic update or geopolitical drama emerged to spur the selloff February 5–6. Instead, emotion-driven investing may have combined with computer-generated trading to fuel the decline. In particular, after the latest labor report showed wage growth picking up more than expected, some investors began to worry about increasing inflation.[vii] Higher wages can mean companies have to raise their prices to support their labor costs, a cycle that can cause inflation to grow.[viii]
While concerns about inflation and interest rates may be to blame for the market fluctuations, it may not be the only detail to focus on. Another key point is important to remember as an investor: Volatility is normal.
Knowing Where to Go From Here
Over short periods of time, the market trades on fear, anxiety, greed, and emotion. Over the long term, however, economic fundamentals drive the markets.
Thankfully, a variety of data indicates that the economy continues to grow:
As investors try to determine whether inflation is on the rise and higher interest rates are imminent, volatility could continue. After last year’s smooth sailing in the markets, these fluctuations may feel harder to withstand. The reality is that equities don’t move in a straight line.
Even if volatility is here to stay, we know that price changes can provide new market opportunities. We agree with the economists at First Trust who assert that, “More economic growth will ultimately be a tailwind for equities, not a headwind.”[xxi]
We encourage you to focus on your long-term goals, rather than short-term fluctuations. As you do, avoid allowing emotions to derail your plans. We also want you to feel comfortable in your financial journey. If your thoughts on risk have changed, call us so we can help you find the best path forward.
As always, we are here to provide you with clarity, perspective, and support during every market environment. Thank you for the confidence you place in our abilities. We consider it a privilege to be good stewards of the assets you entrust to our care.
Monday: Treasury Budget
Wednesday: Consumer Price Index, Retail Sales
Thursday: Jobless Claims, Industrial Production, Housing Market Index
Friday: Housing Starts, Import and Export Prices, Consumer Sentiment
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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.
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[ix] First Trust, Staying the Course, 12/31/17
[xiv] First Trust, S&P 500 Performance After Its Worst Days, 6/17
[xv] First Trust, S&P 500 Performance After Its Worst Days, 6/17
[xvi] First Trust, S&P 500 Performance After Its Worst Days, 6/17