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
About Cetera® Investment Management
Cetera Investment Management LLC is an SEC registered investment adviser owned by Cetera
Financial Group®. Cetera Investment Management provides market perspectives, portfolio
guidance and other investment advice to its affiliated broker-dealers, dually registered brokerdealers
and registered investment advisers.
About Cetera Financial Group®
Cetera Financial Group (“Cetera") is a leading network of independent firms empowering the
delivery of professional financial advice to individuals, families and company retirement plans
across the country through trusted financial advisors and financial institutions. Cetera is the
second-largest independent financial advisor network in the nation by number of advisors, as well
as a leading provider of retail services to the investment programs of banks and credit unions.
Through its multiple distinct firms, Cetera offers independent and institutions-based advisors the
benefits of a large, established broker-dealer and registered investment adviser, while serving
advisors and institutions in a way that is customized to their needs and aspirations. Advisor
support resources offered through Cetera include award-winning wealth management and
advisory platforms, comprehensive broker-dealer and registered investment adviser services,
practice management support and innovative technology. For more information, visit cetera.com.
"Cetera Financial Group" refers to the network of independent retail firms encompassing, among
others, Cetera Advisors, Cetera Advisor Networks, Cetera Investment Services (marketed as
Cetera Financial Institutions), Cetera Financial Specialists, First Allied Securities, and Summit
Brokerage Services. All firms are members FINRA/SIPC.
The material contained in this document was authored by and is the property of Cetera Investment
Management LLC. Cetera Investment Management provides investment management and
advisory services to a number of programs sponsored by affiliated and non-affiliated registered
investment advisers. Your registered representative or investment adviser representative is not
registered with Cetera Investment Management and did not take part in the creation of this
material. He or she may not be able to offer Cetera Investment Management portfolio
Nothing in this presentation should be construed as offering or disseminating specific investment,
tax, or legal advice to any individual without the benefit of direct and specific consultation with an
investment adviser representative authorized to offer Cetera Investment Management services.
Information contained herein shall not constitute an offer or a solicitation of any services. Past
performance is not a guarantee of future results.
For more information about Cetera Investment Management, please reference the Cetera
Investment Management LLC Form ADV disclosure brochure and the disclosure brochure for the
registered investment adviser your adviser is registered with. Please consult with your adviser for
his or her specific firm registrations and programs available.
No independent analysis has been performed and the material should not be construed as
investment advice. Investment decisions should not be based on this material since the
information contained here is a singular update, and prudent investment decisions require the
analysis of a much broader collection of facts and context. All information is believed to be from
reliable sources; however, we make no representation as to its completeness or accuracy. The
opinions expressed are as of the date published and may change without notice. Any forwardlooking
statements are based on assumptions, may not materialize, and are subject to revision.
All economic and performance information is historical and not indicative of future results. The
market indices discussed are not actively managed. Investors cannot directly invest in unmanaged
indices. Please consult your financial advisor for more information.
Additional risks are associated with international investing, such as currency fluctuations, political
and economic instability, and differences in accounting standards.
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks
traded on the New York Stock Exchange and the NASDAQ.
The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry grouping
(among other factors) designed to be a leading indicator of U.S. equities and is meant to reflect the
risk/return characteristics of the large cap universe