Nelson Securities Financial Focus
Stock market, Tax Bill momentum continued in January,
but volatility returned to global markets in February
February 16, 2018
The historic 2017 ended on a strong note in December with the $1.5 Trillion Tax Cuts and Jobs Act passing and signed into law by President Trump sending the US stock market to record highs. The Dow hit a record 71 all-time highs during the year. The momentum in stocks from the Tax Bill and record setting year carried right into 2018. Each of the major US market indexes, from the Dow, S&P 500 and tech-heavy NASDAQ, to the small- and mid-cap Russell 2000 and S&P 400 set multiple all-times highs in January. In fact, it was the strongest start to a year since 1997, as investor sentiment and strong economic fundamentals led the charge.
Strong January Start
Dow jumped 5.8%
NASDAQ surged 7.4%
Benchmark S&P 500 gained 5.6%
Small- and mid-caps, however, lagged adding 2.6% and 2.8%, respectively
Despite some weakness across the board late in the month , US stocks still hit some widely watched early prognosticators for the New Year. For instance, the market was up the first 5-days of January, which is an early sign of strength, and it rose for the month of January satisfying the "so goes January, so goes the year" barometer. And lastly, we saw a positive Santa Claus rally, which measures the holiday season ending January 3rd. Each are good signs for the year's outlook but, of course, are no guarantee of positive results. Foreign markets posted a strong start to 2018 as well, with the benchmark MSCI EAFE index jumping 5% and Emerging Markets surging 8.3%.
What also rose in January and continued their late 2017 trend were interest rates. The 10-year Treasury note yield rose 31 basis points to 2.72% in January. Given the Fed's projected three interest rate hikes in 2018 following its first FOMC meeting of the year, interest rates rising was not necessarily a surprise, it was the magnitude and velocity that caught everyone's attention. However, we would soon find out the market's sensitivity to changes in interest rate expectations in early February.
The market weakness in late January continued in early February and accelerated. A stronger than expected jobs report coupled with a 2.9% year-over-year rise in wages unnerved the market and raised inflation fears as well as a sharp rise in interest rate expectations. The benchmark 10-year Treasury note yield spiked to new 4-year highs, which ignited a 2.5% drop in the Dow Jones Industrials on Friday, February 2nd. The global markets followed suit the following Monday and selling resumed in the US markets.
Worst Week in Two Years
Here is a recap of the week (Feb 5-9):
Monday - Dow plunged 1175 points, or 4.6%. The Dow was briefly down 1,597 points, before rallying to soften the loss. It was the Dow's largest single-day point loss in history, but in percentage terms only the 100th worst loss, according to S&P Dow Jones. It was later discovered that two inverse-volatility VIX Exchange Traded Notes (ETNs), suffered significant losses contributing to the brief 800 point spike down and led to one of them totally collapsing and shut down days later. Volatility had returned to the markets in a big way after a long absence, hitting levels not seen since 2015.
Tuesday and Wednesday - Trading was very choppy with wide swings up and down.
Thursday - Concerns about the potential Government shutdown and rising interest rate fears sent the Dow to its second 1,000 point loss for the week ending down 1033 points or 4.1%.
The major US indexes officially hit 10% correction territory for the first time since early 2016 and tested their 200-day moving averages successfully. Investor resolve was tested again
Friday - The markets opened sharply lower; however, buyers stepped in, reversing the markets and the Dow rallied sharply to close up 330 points, or 1.4%. It was the worst week for the US markets in two years, losing over 5%, but Friday ending on a positive note was a good sign heading into the weekend.
Best Week since 2013
The markets responded in a very positive way this week (Feb 12-16), posting the best weekly gains in five years. Though volatility continued, the markets were more orderly and investors picked up some good values after last week's tumble. The US market posted gains each day (NASDAQ was down slightly Friday) and by week's end had clawed back into positive territory for the year, particularly the tech-heavy NASDAQ up 4.9% YTD. Some strong earnings reports this week didn't hurt either. Volatility subsided from the very high levels last week, but remains elevated. The US market was led this week by...
NASDAQ +5.3% (best since 2011)
Large Cap Dow Jones Industrials and S&P 500 +4.3% each
Small and Mid-caps posted gains of +4.5% and +4.1%, respectively
Foreign markets rebounded as well, taking the lead set by the US markets each day. The MSCI EAFE index gained 4.2% for the week and back into positive territory for the year at 1.2%. Emerging markets jumped 5.0% for the week and is now up 3.6% for the year.
Interest rates continued to push higher for the week, with the 10-year Treasury Note yield again hitting levels not seen since early 2014 and reaching a high of 2.91% on Valentine's Day. Though interest rates closed off their highs for the week, momentum suggests the 10-year will try to test that 3.03% resistance level sometime over the next few weeks. Inflation expectations remain a concern with stronger than expected CPI and PPI reports this week.
We are very encouraged by this week's response as the market tries to recover from the correction. Significant progress was made but we remain about 3-5% below the all-time highs set in January. Volatility and choppy trading, remain in the near-term forecast. We advise investors to remain steadfast with their objectives and investment programs, while maintaining well-diversified portfolios. Remember, corrections are common and healthy for the markets long-term. 2017 was an aberration for volatility; again, while we went on an extended 2-year period without one, corrections historically happen about once a year.
Don't hesitate to make an appointment with your Nelson Advisor at 800-345-7593 to review your portfolio should you have any concerns.
Your Nelson Securities Team