Last Friday I ended the email with a cryptic line “this is the best start to the year for stocks since 1987”. Yes, I was being a smart aleck, but only one person emailed me that afternoon to ask if I was implying that we might have something coming like we did in 1987. For those of you who are too young to remember, we had a bit of a market incident in 1987. It didn’t cause a recession, as actually stocks quickly recovered and the economy stayed on track. But, sometimes stocks just get extremely overbought and it sure felt like we are in one of those situations . Am I saying we are going to crash? NO! I have no idea what the stock market has in store for us, but it is important to remember that the stock market goes up and at times it goes down (though every downturn in the history of the markets has been temporary).
After a record setting January, this has been a difficult week as we start February. Indeed, this was the worst week for stocks in 2 years. Earnings have been good, but share prices were already high. The bond market is showing serious cracks as interest rates are rising. The jobs report this morning was good (the old good news is bad news scenario) with 200,000 new jobs created in January and a 4.10% unemployment rate. The number that is catching the bond market’s eye is average hourly wages which year over year is now up 2.9%. Though great news for workers, the fear is that the labor market gets too hot- spiking wage inflation. That would spark fears that the Fed is behind the curve and will need to raise rates sooner and maybe more dramatically. Thus, we have a very nervous bond market. I know, it’s true -bond prices can go down.
For the day, the Dow Jones Industrial Average was down 665 points to close at 25,520. The S&P 500 was down 59 points to close at 2,762. Gold was down $15 to trade at $1,332 per ounce, while oil was down $.33 to trade at 65.47 per ounce WTI.
Remember, as we detailed in our quarterly outlook, there are a lot of things going on that are good. The economy is strong, corporate earnings are good, unemployment is low, and consumer confidence has been strong. What we have been a bit concerned about is the pace of the stock market’s advance recently. It was beginning to appear that stocks were falling into weaker hands (Johnny come lately), and that a severe case of complacency had begun to set it. Whatever this is, a correction or something worse, it will be temporary. But whatever this is- it was needed.
Have a great weekend everyone.