We have seen a return to volatility in the stock market over the past week and have experienced our first significant pull back in over 80 weeks. Typically, the market averages a 5% pull back every 10 weeks, so the current drawdown was overdue. It's important to realize that the current market action has only eliminated the January gains and the S&P 500 is still up .5% in 2018 after a 21.8% return last year.The driver behind the selloff was a dramatic increase in longer term interest rates and increased inflation expectations spurred by last Friday's strong jobs report.
From a technical perspective, we can see that the blue trendline has historically been support for the market which has typically rallied after reaching this point. Currently the market is near this trendline, so we remain hopeful that most of the selling has dissipated.
According to our research partner Strategas, similar declines in an upward trending market have been buyable with positive forward returns averaging 10.9% 120 days out, since 1950. Not only is the overall market in an uptrend but there is strong breadth with over 75% of the S&P 500 component stocks in an uptrend.
Economic growth is still solid globally, credit markets are behaving well despite the volatility, and corporate earnings are expected to be up double digits this year. These are healthy fundamentals and we think that it is wise for clients to stick to their strategic allocations. Our outlook for equities hasn't changed as a result of this recent volatility.
Mark Evans, CFA
Julie Brotje Higgins, Ph.D., CFA
Richard Sasala, Ph.D., CFA
Matthew "Drew" Sheets, MBA