On Friday, the Dow Jones Industrial Average plunged 666 points as a strong employment report sent Treasury yields toward 3 percent. The S&P 500 ended an unprecedented streak of going without a major pullback. Everything from stocks to bonds and commodities fell. Treasuries sank, with 10-year yields jumping to the highest level since 2014. And commodities from oil to gold got decimated. And, volatility spiked on record VIX options trading.
But, the timing of the plunge is odd, with global growth picking up momentum and earnings estimates rising faster than expected. Unemployment rate holding steady at 4.1%, matching lowest since 2000. The fly in the ointment was interest rates. As the Fed raises rates, Wall Street began to construe it as a sign of faster than expected pickup in inflation i.e. the economy may be overheating.
With all investors chasing the same trade, consensus was building that almost everything is stretched by historic standards. Equities and mutual fund exposure rose to new high while short interest in stocks and ETFs has dropped to the lowest level since 2007.
The question is what’s in store next week and rest of the year?
Future Wealth’s View
The book of Revelation, in Chapter 13:18, reads “Here is wisdom. Let him that hath understanding count the number of the beast; and the number is 666.” While the extent of the Dow’s drop on Friday to the book of Revelation is striking, the similarity ends there. At Future Wealth, we see no sign of an economic recession in the horizon that could precipitate a sustained drop in the stock market toward correction territory. However, we note that, unlike past declines, there seems to be nowhere to hide. In past declines when one industry fell, another rose. But, all of 11 industries in the S&P 500 declined this week.
While valuation correction for both stocks and bonds was way overdue, with unemployment low and consumer confidence high, we believe this is the time for investors to take a deep breath, ignore the stock tickers on their phones and laptops, put away the book of Revelation and instead, pick up and read Benjamin Graham’s “Intelligent Investor” which says “In the end, how your investments behave is much less important than how you behave”.