*Note: I wrote this article this morning prior to the markets big afternoon decline, but everything here still holds true. One day does not make a trend and I believe this is part of the process of markets returning to more normal ebbs and flows. We just didn’t expect it to all occur on one day. –Kern
Want to Know What’s Happening in the Market?
Finally! Yes, finally the markets seem to be returning to more “normal” behavior.
So, what does this mean?
You see, on average, normal markets experience a 5% drop two to three times per year, a 10% correction once per year, and every three years or so the stock market drops over 20%. However, none of these have occurred in a long time.
Even with last week’s drop, we are still barely off new all-time highs. In fact, we are experiencing the longest streak in history without a 5% drop on the S&P 500. This data goes all the way back to 1928.
Take a look…
We have gone 404 trading days!
Note the second ranked period (1994 to 1996). When that streak came to an end, the market continued to climb another 131% over the next four years.
So why has the market seen increased volatility the last few trading days?
Simple answer: A rapid change in bond yields.
There are other reasons too, but one of the most obvious is the rapid change in bond yields (specifically in the ten-year treasury). When bond yields go up, the price of the bond goes down and vice versa.
Here is a chart that highlights the inverse relationship between bond prices and bond yields. When one goes up, the other must come down.
Since the economy is on solid ground and wage growth shows signs of improvement, it is causing bond yields to rise quickly, and bond prices are falling.
The change in bonds is meaningful in two ways:
- The bond market is enormous, and any quick turn can cause an increase in volatility as investors and traders make adjustments.
- Many fundamental stock analysts use the yield on the ten-year treasury as part of their process for modeling and forecasting future stock returns. When the yield breaks out to new multi-year highs, it causes ripples in the market.
So the question most investors want to know is what should they be doing right now?
Many investors have been saying they want to see a pullback before putting more money into the market. Well, this may be your chance.
I want my message to be very clear. I believe this market will continue its charge higher. As of right now, I see no empirical evidence to suggest a long-term bear market type decline is on the horizon. However, as I highlighted above, we are 400+ days into an uninterrupted market rally. No market can maintain this type of march higher day-after-day.
A return to more “normal” conditions where markets ebb and flow is warranted. Seeing a period of selling or consolidation would be good news for the market. As things continue to unfold and more data becomes available, I will know more. I would expect volatility to remain high in the near-term, and I will have my eyes keenly focused on market data.
This is why I always say, “as market facts change so shall we.”
Market facts are showing signs of a return to more normal market ebbs and flows. If we see signs of more significant deterioration of indicators signaling higher market risk, we will adjust portfolios accordingly.
If you would like to discuss your specific holdings or other financial topics, please give us a call at (800) 722-5862, and we can go through how all of this impacts you directly.
That is all for today my friends! Congratulations to any fans of the Philadelphia Eagles. I know you must be excited after such a great game.
Thanks,
Kern
