The U.S. stock market plunged Monday, with the Dow Jones falling nearly 1,600 points at one point, the biggest single day drop in its history. It then turned around and regained 567 points on Tuesday. The whipsawing continued for the rest of the week. At the close on Friday, the Dow, S&P 500 and Nasdaq all finished the week down ~5% for the week.
After predicting a decline for many months, the experts have finally been proven right. All the major indices are well below the all time highs and appear to be struggling for direction. In the meantime, investors are running in different directions, many of them leading to the same destination.
The Cboe Volatility Index, or VIX, as it’s known, woke up from its sleepy steady state range of 10-12 it spent in all of 2017, surging up to 50 before settling at 29 on Friday. With VIX long term futures contracts more expensive than the short term ones, the VIX is signalling for more volatility to come near term.
Future Wealth’s View
The frustrating part of the week’s market action was that there was not one specific thing or event that drove the massive volatility. Was it the January jobs report or that the Fed could become more aggressive with interest rates or is it simply that market has run up so much so fast that it was time for a breather?
One thing is clear to us – The ongoing market correction doesn’t reflect a worsening of economic and corporate fundamentals. After pretty solid Q1 2018 earnings season with majority of the corporations reporting better than expected results coupled with strengthening global economic data, we can only attribute the volatility to a highly unusual period that preceded the turmoil – U.S. stocks went more than 400 days without a 5 percent pullback and, in 2017, the Dow Jones Industrial Average registered more than 70 highs.
While the past week will likely change investor sentiment although it should’nt, the market action has given us an important signal that demands respect and requires investors to take a hard look at financial stability in their portfolios.