Return of the Correction and Inflation
For nearly two years, the stock market has ticked up continually with a distinct lack of volatility (See January Market Insight Email). All that changed in February as we added an entry to the official list of stock market corrections. A correction is at least a 10% drop in the market. Here’s a list of the corrections in the S&P 500 from 2008 – 2018*:
• 2008 Financial Crisis: -56.8% over 517 days
• 2010 Flash Crash: -16.0% over 70 days
• 2011 US Economy Slows: -19.4% over 157 days
• 2015 Chinese Stock Market Crash: -12.4% over 96 days
• 2015-16 Market Selloff: -13.3% over 100 days
• 2018 Overheating: -10.2% over 13 days
A good economy has just the right amount of inflation and the Fed has been saying for some time that it would like to see inflation right around 2%. It’s a fine line on which to balance.
• Too little inflation may lead to deflation, where prices fall, companies make less, and in turn have to pay their workers less or lay off people.
• Too much inflation erodes the buying power of any asset class. For example: if you make 6% on your portfolio in a year of 4% inflation, your real return is 2%. Those investing in the 70’s and 80’s will remember of a time of runaway inflation.
On Valentine’s Day, the CPI report surprised and came in hotter than expected with January CPI coming in at 0.3% vs the expected 0.2%. Although it caused some short-term selling, the good news was that it brought the year-over-year inflation number to 1.8% (strong, but still below the 2% target). Rising inflation, and specifically the rate at which inflation rises, remains the largest risk in the foreseeable future.
In summary, we’re seeing strong economic growth, solid corporate earnings and at the same time are facing central bank tightening and rising inflation. All this will add up to a choppy 2018. The best course of action during volatile markets like this is to maintain proper diversification according to your risk tolerance, and be patient.
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Enjoy the passing of winter and the beginning of spring!
|S&P 500 Composite (Large Cap)||-3.69%||1.83%|
|Russell 2000 (Small Cap)||-3.87%||-1.36%|
|MSCI World Ex-Us||-4.75%||-0.31%|
|Barclays US Aggregate Bond||-0.95%||-2.09%|