Broker Check
Markets Have Been Waiting for a Pullback

Markets Have Been Waiting for a Pullback

| February 06, 2018

Recently Cetera Investment Management wrote an article about the volatility that has returned to the stock market.  It is a good reminder that volatility is normal and to be expected, even though we haven't experienced it much during this market run up.  

"The recent sell-off is not that unusual, but something we have not seen in a long time. Before the pullback, we had gone the longest period without a 3% sell-off (drawdown from peak) in the S&P 500 (311 trading days). The next longest streak was 241 trading days, and that dated back to 1995-1996. Taking all of this into a historical context, 3% selloffs generally happen every 32-trading days, so the most recent period without such a dip was really the anomaly."

The entire article follows below.  If you have questions about this article or about your portfolio, please contact myself or Sid Ruth at (267) 384-5300.

Cetera Sightline (published 2/5/18)

Markets Have Been Waiting for a Pullback                                                      

Last Friday, equity markets fell sharply, with the Dow Jones Industrial Average dropping 666 points
or 2.54%. This decline represented the largest single-day percentage loss since a 3.4% fall in June,
2016. Similarly, the S&P 500 sank 2.1% on Friday, which was its fourth decline in the past five
trading days, extending a 3.8% loss for the week, its largest weekly decline in two years. Even
beyond these headline numbers, Friday’s sell-off was clearly widespread as all 11 major sectors
ended negative and over 92% of S&P 500 companies posting a loss for the week. After nearly nine
straight years of market gains, last week represented a reversal.

Driving the market sell-off were mounting concerns over the jump in bond yields, as the 10-year
Treasury yield rose 0.19% to 2.85% last week. This is in contrast to its historic low of 1.37% on July
5, 2016. A stronger-than-expected January payroll report that indicated a 2.9% year-over-year
increase in average hourly wages, the highest 12-month growth in wages since May 2009, was the
primary cause of the jump in yields. Investors were concerned that strong wage growth could prompt
inflationary concerns for the Federal Reserve, which could respond with a more aggressive plan to
raise interest rates. Given how mortgage rates, credit card interest rates and other borrowing costs
tend to take their cue from the Fed, economic growth may be impacted.

The question for investors today is whether last week’s sell-off is the beginning of a bear market or a
just a pause. While we are firmly in the camp that last week was just a market pause that may linger
into this week, we do believe a pickup in volatility will be the new norm. To the first point, though
valuations are extended, we believe there are still positive fundamentals in the market. These
include continued strong corporate earnings, tax reform benefits to both the consumer and business,
the fact that inflation can be good for the economy as companies can raise prices, and a weak dollar
is great for U.S exports.

To the second point, we have been calling for increased volatility for some time, as the Federal
Reserve becomes less accommodative in their policies. The recent sell-off is not that unusual, but
something we have not seen in a long time. Before the pullback, we had gone the longest period
without a 3% sell-off (drawdown from peak) in the S&P 500 (311 trading days). The next longest
streak was 241 trading days, and that dated back to 1995-1996. Taking all of this into a historical
context, 3% selloffs generally happen every 32-trading days, so the most recent period without such
a dip was really the anomaly.

While we return to volatility levels that are more typical, investors should remember to be diversified
in their portfolios and not have too much risk in one area. Equities are at high valuations and bond
yields are still at relatively low levels. There are risks in both bonds and equities, so diversifying
within and amongst different asset classes is important. 

Because markets are concerned with the sharp jump in bond yields, having lower duration exposure
(interest rate sensitivity) makes sense. However, since yields have risen so fast and domestic yields
trade much higher than other developed nations, we would not eliminate all duration in your portfolio.
Furthermore, it is imperative to diversify the types of exposure within fixed income. However, too
much high yield exposure can carry equity-type risk and defeat some of the diversification benefits
from owning bonds.

This report is created by Cetera Investment Management LLC

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