Gill Capital Partners February 7, 2018 Market Update
Following the exceptional financial market movements we saw yesterday, we wanted to share our thoughts on what happened, how our Investment Committee views this volatility, and what, if anything, has changed.
February 5, 2018 Market Selloff
Monday’s market selloff saw the Dow Jones Industrials Average fall 1,175 points, the greatest single point drop in history. While this was the largest intra-day drop in terms of points, it equates to a 4.6% decline, which is nowhere near the 22% decline that occurred on October 19, 1987, also known as “Black Friday.”
What caused the sudden and dramatic selloff?
The selloff was initiated on Friday when the Labor Department released its monthly jobs report outlining hiring and wages from the Month of January. The report showed that the economy added a healthy 200,000 jobs, but more importantly, that wages grew by 2.9%, the largest increase since 2009. This all seems like positive news; however, the market is very focused on inflation, and rising wages will drive inflation, which could cause the Federal Reserve to increase interest rates more quickly. This was one of the first signs of inflation that we have seen in quite some time, and the market is concerned about what could happen 12-18 months from now. Almost every major recession has been caused by the Federal Reserve reacting too aggressively to an overheated economy when they see wage growth and inflation begin to present themselves.
Where are the markets likely to go from here?
U.S. equity markets were down between 6% and 8% over the past three trading days, but regained half that loss in yesterday’s trading session. We have essentially given up the dramatic gains we saw during the month of January. While this has been unsettling, it is a healthy correction for a market that has seen substantial gains over the past 12+ months.
So, will the selling continue? When we look back on previous corrections, this has the look and feel of a market that likely does not have much further to fall in the near-term. Moves like this have historically been followed by a relatively quick snap back, though not always back to pre-correction levels, as evidenced by yesterday’s strong rally. The chart below depicts the Dow Jones Industrial Average Index (orange line) and the VIX, or volatility index (white line), going back to
- The VIX is commonly used to measure fear in the market. When markets selloff, the VIX spikes as investors panic and sell indiscriminately. We have labelled each of the major selloffs that have occurred since 2000, and as you can see they all coincide with a measurable spike in the VIX near a reading of 40, except for the financial crisis in 2008/9, which saw readings approaching 100. Monday’s move was on par, in terms of fear and panic, with other events such as the World Trade Center bombing, the bursting of the Dot-com bubble, the 2010 sovereign debt crisis and the “flash crash,” and the commodity and Chinese equity crash of 2015.
Historical Equity Market Corrections & the VIX
Monday’s correction, which many would argue was long overdue, saw panic selling that had all the markings of a short-term “risk off” event, an overdue and somewhat healthy reality check. The bottom line is that economic fundamentals are
very strong and continue to strengthen. Yes, we are beginning to see leading indicators of inflation, but they have yet to materialize. Returns going forward may not be as strong as they were over the past 12 months, but that does not mean we are heading into a recession. We just might be returning to more reasonable times.
Save the Date – Lunch and Learn!
Update: New Tax Plan – With Jeff Rattiner, CPA, CFP®
Please join us for lunch at the Denver Country Club on Monday, February 26th from 11:30am to 1:30pm for a very informative discussion on the new tax plan and how to prepare for it. Mr. Jeff Rattiner is a nationally recognized speaker in the financial services industry, with expertise in tax planning and strategy. Jeff holds the designations of CPA and CFP®, and has been teaching and practicing in the financial services community for 30 years.
He was named the “Financial Planner of the Year” by CPA Magazine in 2003 and has been awarded the “Distinguished Faculty Member-Teacher of the Year” by the Community College of Denver.
Mr. Rattiner has authored eight books on financial planning subject matter (including tax), and is a leading authority and sought-after speaker in the industry. Jeff’s lively and entertaining teaching style has served professionals well for 30 years and will be sure to keep you entertained as he discusses the new tax plan and how it will impact you in 2018.
We hope you will be able to join us for this unique event. A formal invitation is on its way.
As always, please let us know if you have any question or concerns, or if we can provide assistance with any other financial planning matters including education, taxes, insurance or estate needs.