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Wild World

by Jon Aldrich

It was yet another wild week in the stock market. As Cat Stevens a.k.a. Yusuf Islam penned in his 1970 album “Tea for the Tillerman” it sure has been a Wild World in the stock market lately. On Tuesday the Dow dropped 799 points (Geez, couldn’t it have squeaked out another point to make it 800). Markets were closed on Wednesday to honor the life of our 41st President George H.W. Bush. The action picked right up where it left off on Thursday with the Dow tumbling as much as 700 points before a late day rally had the archaic index off less than 100 points.

Then Friday arrived, the day started off positive, but sellers took over and the Dow finished down about 560 points, which is about 2.25%. As I have written about many times over the years, 500 and 800 point moves in the market are not nearly as dramatic now with the Dow currently around 24,000 or so as they are when the Dow was only around 10,000 a few years ago. An 800-point drop is around a 3% drop today. A handful of years ago and 800-point drop in the Dow might have been an 8% move. Big difference. Heck, when the big crash of Black Monday in October 1987 occurred the Dow dropped 508 points which was over a 22% drop at the time. We dropped more than that twice this week and almost 3 times when you consider how far the Dow was down on Thursday before recovering.

We are in the midst of another market correction, not unlike the many others we have seen since emerging from the Great Recession almost 10 years ago:

S&P 500 Corrections

Corrections are always scary while we are in the middle of them and they usually last anywhere from a month to 5 or 6 months. We have been chopping around for about 2 months now, so there could still be some time left until things recover. After quite a bit of bouncing around, the market is back to where it was at the end of October.

S&P 500 since late October

S & P 500 the last two months

There is still a lot of consternation in the markets due to the uncertainty of trade wars with China and now the recent detainment in Canada (at the request of US authorities due to national security concerns) of an executive of the Chinese technology company Huawei which is a large player in the smartphone and telecommunication industry.

This threatens to throw a wrench into the trade talks that are in the early stages between the U.S. and China to try to come to an agreement so that large tariffs are not slapped on each other’s goods prompting a trade war that could lead to a serious slowdown in the Chinese economy that would likely spill over to the rest of the world. The President stoked the fire early in the week when he proclaimed himself the “Tariff Man” in a now infamous Tweet. Needless to say, the markets did not react favorably to this proclamation.

Tariff Man

The other item that has roiled the markets this week was the worry that the Yield Curve is inverting.  Here is a good, concise explanation of the yield curve and what an inversion may mean. Essentially it is when the yield on 2 Year Treasury Notes exceeds the yield on 10 Year Treasury Bonds. You can see below, that they are getting close, but have not yet inverted. The last several recessions have been preceded by a yield curve inversion and it is getting close but has not yet occurred.

Yield Curve

Finally, is all this volatility we have seen recently normal? The chart below shows the number of times the S & P 500 moved greater than 1% up or down during the day in each year going back to 1958. The red line is the long- term average and you will note that we are right in line with the long-term average. Also note last year how calm things were in 2017 with only a handful of days that moved greater than 1% up or down. 2017 really spoiled us.

S&P 500 Daily Moves

Yes, there is a lot of excitement in the market, but all this recent volatility is really not all that unusual and has happened on numerous occasions over the last decade. Maybe Santa Claus will ride to the rescue and provide a “Santa Claus” rally that investors often expect in December.

If all this volatility is troubling you, please call us or schedule a meeting to discuss and possibly make changes if needed based on your own individual situation.