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Recent Market Volatility & Some Perspective

Investing

Focus on Percentages, Not Points

During the first couple of days in February 2018, the stock market has had a few drastic down days, making investors nervous with the sound of each closing bell. However, let’s take a longer-perspective for a minute:

2017 Was A Fantastic Year

While all the headlines are focusing on the recent market declines, let’s not forget how the markets performed last year. Here is a summary in case you have forgotten:

  • NASDAQ ended the year 28% higher – its best year since 2013;
  • The Dow Jones Industrial Average ended the year 25% higher – its best year since 2013;
  • The S&P 500 ended the year 19% higher – its best year since 2013;

The First Four Weeks of 2018

Further, let’s not forget how the markets performed through the first four weeks of 2018. Here is a summary of the markets through January 26, 2018 – in case you have forgotten:

  • Stocks hit fresh highs again, with all the major sectors moving higher. This is the fourth-straight weekly gain to start the new year;
  • NASDAQ advanced 2.3%; the S&P 500 moved 2.2%, and the DJIA climbed 2.1%. The end of the week saw all three indices finish at new all-time highs with YTD gains of between 7.5% and 8.7%

The Fifth Week of 2018

Then during the fifth week of 2018, the market started moving backwards – a lot. Here is a summary of the markets during the fifth week of 2018 (through February 2, 2018): Stocks fell hard this week, eating into their impressive 2018 gains – the DJIA dropped 4.1%; the S&P 500 gave back 3.9%, and the NASDAQ erased 3.5% This was the first weekly drop by the major stock market indexes in 2018 and the worst since January 2016 *Despite last week’s decline, the markets are still positive for the year by a healthy amount. YTD, the DJIA is up 3.2%, the S&P 500 is up 3.3%; NASDAQ is up 4.9% and the MSCI EAFE Index is up 5

Monday, February 5th

As everyone knows, stocks then went into a dramatic spiral on Monday, February 5th, as the DJIA plummeted almost 1,600 points, which was the biggest point decline in history. But right before the market closed, buyers charged back into the market and limited the damage – but the DJIA still lost 1,175 points.

When it was over, the DJIA closed at 24,345, down 4.6%; the S&P 500 dropped 113 points, or 4.1%, to 2,648; and NASDAQ lost 273 points, or 3.78%, to 6,967.

The sell-off essentially wiped out the DJIA and S&P 500 gains for the year, and left the NASDAQ barely in positive territory for 2018.

But let’s remember this: it was about a month ago when we were in awe as the DJIA crossed 25,000 for the first time. The markets have had a fantastic almost 9-year bull market run and market pullbacks like what we just witnessed are absolutely normal.

Why the Pullback Now?

Market experts will spend the next few days trying to explain exactly why the market pulled back when it did and even more time trying to predict where the market is headed. And we all know that no one can do either.

That being said, there are some underlying trends that investors ought to be aware of, starting with this: the market has been on an unprecedented 9-year bull-market run, so a pullback is long overdue. And the fact that people have been talking about a correction for a very long time probably had something to do with the recent decline.

But most would agree that Friday’s jobs report triggered the sell-off. It sounds counterintuitive, but rising wages actually make the stock market nervous because rising wages could signal rising inflation, which is a headwind for growth.

The recent Employment Situation Report from Friday showed 2.9% wage growth from the year before, which signals a further tightening labor market and possibly an overheating economy. That in turn could prompt the Federal Reserve to increase interest rates faster than expected.

Some More Perspective

The DJIA fell by 1,175 for a 4.6% decline. And while headlines scream that this was the biggest single-day point decline, on a percentage terms there have been so many worse ones.

Remember that “only” 508- point drop in the DJIA in 1987? Well that was a 22.6% drop – a market crash.

At the very least, it might be helpful to think about percentages rather than points when trying to determine what constitutes a big market swing.

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