Market Update February 6th 2018

Bull Market Indigestion, Not Heart Attack:
This correction is extremely technical, mechanical and programmed, not fundamental. When these sharp bull market corrections happen (whatever triggers them initially) they are generally followed by a strong rebound rally, and then another test of the lows, or even further lows, before the next up-leg begins. In today’s markets all of that can happen in anywhere from a couple of days to 2-3 weeks.
The market sell-off was first triggered last week by a sudden bond market decline, which bled into some stock selling. It then went far enough to trip technical and quantitative sell indicators and sell programs.
The bond market sell-off was triggered in the first place by reaction to increased first quarter economic growth projections, and a wage growth report that surprised to the upside. Both caused fear among bond investors that interest rates and inflation may now rise faster than they had been expecting. These are not conditions that typically cause stock bear markets. Quite the opposite.
On average stock markets experience three 5% declines per year, and a 10% decline every 18-months to 2 years or so. That is what is normal, even in bull markets. We didn’t get a 5% decline last year. In fact we didn’t even have a down month. But that isn’t abnormal following two 10% corrections within six months like we had in fall of 2015 and the beginning of 2016. Nevertheless, markets have been overdue for some type of pull-back or breather. But we have been hearing those warnings everywhere since early last year, and many have missed an incredible market run since then. Bull market corrections are extremely hard to predict and time.
When optimism and stock market in-flows increase too rapidly, we can periodically get these corrections that go far enough to trigger an avalanche of sell programs, turning it into a sharper correction. We are investors, not speculators or traders. These bull market corrections are the market’s way of periodically cleansing out too much emotion and rhetoric, and they are healthy. Let the traders try to time them. I have never seen any statistical proof of anyone or any firm being able to time them with any consistency.
We remain in an excellent environment to own stocks. Corporate earnings forecasts have just been revised upward at the fastest pace on record, and most other ingredients remain in place for stock outperformance. Rising interest rates and inflation will undoubtedly cause more market volatility going forward, as investors worry that the Fed may either raise interest rates too quickly or too slowly.
Most of the selling this past two days wasn’t by investors who suddenly now think bonds or cash are a better place to invest for the next few years. Most sold because their technical or quantitative-based sell programs were triggered, and when the dust settles they will be looking to buy back from frightened individual investors who sell.
By the end of this year we will likely barely remember this early February correction. Similar to the Brexit vote correction in the summer of 2016.
For now, call or email me if you get too concerned.