After four 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%.[1] International stocks in the MSCI EAFE also took a 2.78% hit.[2] 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.[3]   

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.[4] 

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.[5]  

Analyzing the Reaction

When labor data came out, bond yields jumped and 10-year Treasury yields hit their highest level in 4 years.[6] Stocks sank in reaction to these interest rate gains.[7] 

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.[8] With inflation can come rising interest rates.[9]

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.[10] 

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.[11] 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.[12] 

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  

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.

The Federal Reserve System (also known as the Federal Reserve and, informally, as the Fed) is the central banking system of the United States. The Federal Reserve System is composed of 12 regional Reserve banks which supervise state member banks. The Federal Reserve System controls the Federal Funds Rate (aka Fed Funds Rate), an important benchmark in financial markets used to influence the supply of money in the U.S. economy.

Inflation is the rise in the prices of goods and services, as happens when spending increases relative to the supply of goods on the market. 

Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

Past performance does not guarantee future results.

You cannot invest directly in an index.

Consult your financial professional before making any investment decision.

Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.

These are the views of Platinum Advisor Marketing Strategies, LLC, and not necessarily those of the named Broker dealer or Investment Advisor, and should not be construed as investment advice. Neither the named Broker dealer or Investment Advisor gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.

[1] http://performance.morningstar.com/Performance/index-c/performance-return.action?t=SPX®ion=usa&culture=en-US

http://performance.morningstar.com/Performance/index-c/performance-return.action?t=%21DJI®ion=usa&culture=en-US

http://performance.morningstar.com/Performance/index-c/performance-return.action?t=@CCO

[2] www.msci.com/end-of-day-data-search

[3] www.bloomberg.com/news/articles/2018-02-02/stocks-in-rate-wringer-with-rout-raising-existential-questions

[4] www.theguardian.com/business/2018/feb/02/us-bond-market-rout-fears-trigger-wall-street-sell-off

[5] www.ftportfolios.com/Commentary/EconomicResearch/2018/2/2/nonfarm-payrolls-rose-200,000-in-january

[6] www.bloomberg.com/news/articles/2018-02-01/asia-stocks-to-slide-as-tech-stumbles-bonds-drop-markets-wrap
[7] www.cnbc.com/2018/02/02/us-futures-move-lower-as-investors-worry-about-rising-yields.html

[8] www.theguardian.com/business/2018/feb/02/us-bond-market-rout-fears-trigger-wall-street-sell-off

[9] www.cnbc.com/2018/02/02/us-futures-move-lower-as-investors-worry-about-rising-yields.html

[10] www.theguardian.com/business/2018/feb/02/us-bond-market-rout-fears-trigger-wall-street-sell-off

[11] www.cnbc.com/2018/02/02/us-futures-move-lower-as-investors-worry-about-rising-yields.html

[12] http://performance.morningstar.com/Performance/index-c/performance-return.action?t=%21DJI®ion=usa&culture=en-US