In a Jumpy Market, Keeping Your Nerve is Important

In a Jumpy Market, Keeping Your Nerve is Important

February 12, 2018

Michelle Holmes
Trust Investment Officer

Last Monday was the worst trading day since the flash crash of 2010. At one point during the day, the Dow Jones Industrial Average index (Dow) was down over 1,500 points and the S&P 500 index closed down over 4%. The point loss in the market was greater than the flash crash of 2010, which nearly reached a 1,000-point decline on the Dow. The percentage decline was less, topping out at 6.3% compared to 9.2% in 2010. The cause? Better than expected wage and employment numbers on Friday February 2 started the market downturn that carried over into Monday.

Despite high valuations in the stock and bond markets, markets experienced low volatility in 2017. Investor sentiment was high, and inflation expectations were low. What changed?

Inflation expectations changed. The U.S. average hourly earnings report showed the fastest pace of annual pay increases since 2009, with wages up 2.9% over last year.

Is this the start of a bear market? Probably not. A bear market is a decline of 20% or more. What we experienced was most likely a return to normal market volatility. Even with Thursday’s decline, the market has just entered correction territory. A market correction is a decline between 10% and 20%. Although we have not seen a market correction since 2015, market corrections occur on average about once per year. The recent market correction may be more of a buying opportunity rather than the signal of a bear market.

As we look to the rest of 2018, we expect global growth to rise. The International Monetary Fund (IMF) increased global economic growth forecasts by 0.2% to 3.9% for 2018. Corporate profits are strong and many companies are beating earnings and revenue expectations. The combination can keep markets moving higher even as we approach the late stages of the economic cycle. Keep in mind, volatility will likely remain higher throughout the year.

If you want to know how this or other news items may affect your portfolio, contact the Security National Bank Wealth Management team today.