History Making Streak Ends
A historic streak ended with the close of the market on Wednesday, which was the final trading day of February. On a total-return basis, the S&P 500 fell 2.6% over the course of the month. That drop represents the benchmark index’s first decline since October 2016, meaning an uninterrupted 15-month rally came to an end. That is by far the longest such streak in the history of the S&P 500; the previous record was a 10-month rally that ended in September 1995. Until February, it had been almost 400 days since a 5% pullback. In fact, the largest peak to trough drop in 2017 was just 2.8%.
Interestingly, there is actually some good news causing some of the recent volatility. Very low unemployment and solid job growth has begun to cause a rise in wages. Recent job reports have shown wages are rising more than they have in almost a decade. This is beginning to cause fears of rising inflation, which is causing concerns that the Federal Reserve (now led by new Chairman Jerome Powell) will raise rates faster. A rising interest rate environment would be a drastic change from nearly three decades of interest rates decreasing. As we've said many times before, markets repricing a paradigm shift can be a volatile process.
Over short periods of time, markets can be volatile based on headlines and recent data. But over time, economic conditions and the direction of corporate earnings should drive stock market performance. The US economy is near full employment, manufacturing and service activity is at multi-year highs, and corporate profits are still rising. These same trends are playing out around the world. Volatility and pullbacks that occur against the backdrop of strong economic fundamentals and rising corporate profits – as is the case currently – are usually brief and temporary. Having said that, market volatility and market pullbacks don’t come with an expiration date, which is why we have our AFP Defined Risk Strategy in place to protect our clients against larger losses.
February should remind investors that stocks can be volatile and are still capable of sharp losses. As we wrote in our February insight article, market volatility is a normal, and even healthy, part of investing. We think increased volatility will be the norm rather than the exception moving forward.
Bottom Line: Market volatility is a normal, healthy part of investing. The historic streak that just ended was not normal.