Wow, what a rollercoaster!
PEEK OF THE WEEK
February 12, 2018
Leif Hagen & Donna Roberts
The Markets
Back to reality...
After
months of eerie calm, stock market volatility has returned. The CBOE Volatility
Index (VIX) – a measure of how turbulent investors expect stock markets to be
during the next 30 days – appeared to fall asleep in November 2016. For more
than a year, a level of serenity that is rarely associated with stock markets
prevailed and U.S. share prices moved steadily higher.
It
appears that time is behind us. Barron’s
wrote:
“With
February’s swift stock market correction, volatility has arrived and will
probably stay awhile. The downturn last week ended a streak of 404 trading days
without a 5 percent drop in stock prices from the previous high – the longest
such streak in market history.
The last
correction came in February 2016, when stocks dropped 15 percent. Investors
then fretted that Chinese economic growth might be slowing, which turned out to
be a false alarm. Long term, the latest nose dive might yet become just a bull
speed bump, but there’s already been plenty of pain.”
So, is
this a speed bump or is it the beginning of a bear market? A bear market,
generally, is a decline of 20 percent or more, and it is normally accompanied
by a recession, which is a significant decline in economic activity.
In
general, financial firms and publications do not anticipate a recession in
2018, but forecasting recessions can be challenging.
No
matter what happens, the key is keeping your head. At times like these, emotion
grabs investors by the throat, and it can be difficult to recall markets and
economies tend to move in cycles. Historically, bull markets lead to bear
markets, which lead to bull markets. Likewise, economic expansions are followed
by contractions (recessions), which are followed by expansions.
U.S.
stock markets rallied on Friday, but the Standard & Poor’s 500 Index, Dow
Jones Industrial Index, and NASDAQ all finished the week more than 5 percent
lower.
Data as of
2/9/18
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
|
Standard & Poor's 500 (Domestic
Stocks)
|
-5.2%
|
-2.0%
|
13.5%
|
8.6%
|
11.5%
|
6.9%
|
|
Dow Jones Global ex-U.S.
|
-6.3
|
-2.7
|
16.0
|
4.4
|
3.7
|
0.9
|
|
10-year Treasury Note (Yield Only)
|
2.8
|
NA
|
2.4
|
2.0
|
2.0
|
3.6
|
|
Gold (per ounce)
|
-1.3
|
1.4
|
6.3
|
2.0
|
-4.5
|
3.7
|
|
Bloomberg Commodity Index
|
-3.9
|
-2.9
|
-3.3
|
-6.1
|
-9.4
|
-8.0
|
|
DJ Equity All REIT Total Return Index
|
-4.2
|
-9.6
|
-2.9
|
1.9
|
6.7
|
7.3
|
S&P 500, Dow Jones Global ex-US,
Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does
not pay a dividend) and the three-, five-, and 10-year returns are annualized;
the DJ Equity All REIT Total Return Index does include reinvested dividends and
the three-, five-, and 10-year returns are annualized; and the 10-year Treasury
Note is simply the yield at the close of the day on each of the historical time
periods.
Sources: Yahoo! Finance, Barron’s,
djindexes.com, London Bullion Market Association.
Past performance is no guarantee of
future results. Indices are unmanaged and cannot be invested into directly. N/A
means not applicable.
market downturns are not a destination. Markets and economies are cyclical. For instance, from 1945
through 2009 (the start of the current expansion), the United States
experienced 11 economic cycles. The average recession lasted for about 11
months and the average expansion persisted for about 58 months, reported the National Bureau for Economic Research.
After
the recent market decline, many people are concerned the bull market may have
run its course, and a bear market may be ahead. Since bear markets usually mark
the beginning of recessions, let’s take a look at what some leading financial
companies and publications have to say about their expectations for 2018:
“The
U.S. expansion is on course to become the longest on record, stirring concerns
it is about to run out of steam. But is it? The recently enacted tax overhaul
and higher federal spending could add 0.8 percentage point to U.S. GDP [gross
domestic product] growth in 2018, we estimate. This could tip the balance
toward accelerating growth. Such a boost could shorten the cycle’s expiration
date to two or three years.”
--BlackRock
Investment Institute, February 7, 2018
“Most
analysts think that while profits are growing and the economy is healthy, the
stock market will be supported. But there is scope for a lot more choppiness as
investors await the Federal Reserve’s rate decisions and look for data to
indicate whether inflationary pressures are rising.”
--The Economist,
February 8, 2018
“Perhaps
the over-arching risk is complacency. While the current conjuncture might
appear to be a sweet spot for the global economy, prudent policymakers must
look beyond the near term…The next recession may be closer than we think, and
the ammunition with which to combat it is much more limited than a decade ago,
notably because public debts are so much higher.”
--IMF Blog,
January 22, 2018
“While
we expect volatility will be higher this year than in 2017, with company
fundamentals looking solid and synchronized global economic growth set to
continue, it seems reasonable to expect that stocks will move higher over the
coming year.”
--J.P. Morgan
Asset Management, February 5, 2018
“An
overheating global economy could mean a more rapid shift by central banks to
rein in stimulus, often a precursor to recession. Yet, we still believe a
recession is not on the near-term horizon.”
--Schwab market
commentary, February 9, 2018
Forecasting is a difficult task. Time will tell.
Weekly
Focus – Think About It
“Stock market goes up or down, and you can't adjust
your portfolio based on the whims of the market, so you have to have a strategy
in a position and stay true to that strategy and not pay attention to noise
that could surround any particular investment.”
--John
Paulson, Investment manager
Best Regards,
Leif M. Hagen
Leif M. Hagen, CLU, ChFC
LP Financial Advisor
Securities offered through LPL Financial Inc., Member FINRA/SIPC.
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* This newsletter was
prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with
the named broker/dealer.
* The Standard & Poor's
500 (S&P 500) is an unmanaged group of securities considered to be
representative of the stock
market in general. You cannot invest directly in this index.
* The Standard & Poor’s
500 (S&P 500) is an unmanaged index. Unmanaged index returns do not reflect
fees,
expenses, or sales charges.
Index performance is not indicative of the performance of any investment.
* The 10-year Treasury Note
represents debt owed by the United States Treasury to the public. Since the
U.S.
Government is seen as a
risk-free borrower, investors use the 10-year Treasury Note as a benchmark for
the long-term bond market.
* Gold represents the
afternoon gold price as reported by the London Bullion Market Association.
The gold price is set twice
daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in
U.S. dollars per fine troy ounce.
* The Bloomberg Commodity
Index is designed to be a highly liquid and diversified benchmark for the
commodity futures market. The Index is composed of futures contracts on 19
physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT
Total Return Index measures the total return performance of the equity
subcategory of the Real Estate Investment Trust (REIT) industry as calculated
by Dow Jones.
* Yahoo! Finance is the
source for any reference to the performance of an index between two specific
periods.
* Opinions expressed are
subject to change without notice and are not intended as investment advice or
to predict future performance.
* Economic forecasts set
forth may not develop as predicted and there can be no guarantee that
strategies promoted will be successful.
* Past performance does not
guarantee future results. Investing involves risk, including loss of principal.
* You cannot invest directly
in an index.
* Consult your financial
professional before making any investment decision.
* Stock investing involves
risk including loss of principal.
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Sources:
https://www.barrons.com/articles/seat-belts-fastened-volatility-ahead-1518237935 (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/02-12-18_Barrons-Seat_Belts_Fastened-Volatility_Ahead-Footnote_2.pdf)
http://www.cboe.com/products/vix-index-volatility/vix-options-and-futures/vix-index/vix-historical-data (Click on “VIX data for 2004 to present (Updated
Daily)”)
http://www.barrons.com/mdc/public/page/9_3063-economicCalendar.html (Click on U.S. & Intl Recaps, “A sea of red ink,"
then scroll down to the “Global Stock Market Recap” chart) (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/02-12-18_Barrons-Global_Stock_Market_Recap-Footnote_7.pdf)
https://www.economist.com/blogs/economist-explains/2018/02/economist-explains-6 (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/02-12-18_TheEconomist-Why_Share_Prices_are_See-Sawing-Footnote_9.pdf)