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Markets Gave Investors a Wake Up Call In February

THE MONTH IN BRIEF
Investors certainly received a wake-up call in February. A correction hit Wall Street for the first time in nearly two years, and benchmarks overseas were also challenged. Two weeks later, though, the S&P 500 had gained back more than half of what it had lost in the dive. Prices of important commodities sank early in the month, but recoveries followed. While the latest readings on fundamental indicators were largely upbeat, reports on retail sales and home sales disappointed. As the Jerome Powell era began at the Federal Reserve, investors wondered if four rate hikes would occur this year rather than the three the central bank had envisioned, given inflation pressure.1

DOMESTIC ECONOMIC HEALTH 
While the rollercoaster ride taken by equities dominated the news stream last month, inflation was also a hot topic. According to the Department of Labor, the Consumer Price Index advanced 0.5% in January, leaving annualized inflation at 2.1%. The monthly number was the concern: the half-percent gain represented the largest single-month inflation jump in a year. The core CPI rose 0.3% in a month, which it had not done in nearly 13 years. Producer prices climbed 0.4% in January, with their year-over-year increase at 2.2%. Did the January numbers amount to an aberration, or was inflation pressure now stronger than it had been in some time? February’s data, due in mid-March, may shed further light on the matter.2,3

 

The Conference Board’s monthly barometer climbed another 6.5 points to a remarkable

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Fed Emphasizes Gradual Policy Firming

FEWER HOMES ARE SELLING

Demand is high, prices are high, and inventory is slim. In view of these factors, the 4.8% year-over-year fall for existing home sales just reported by the National Association of Realtors is not surprising. It represents the largest annual decline seen since August 2014. Other January NAR data showed homebuying down 3.2% from December levels and a median sale price of $240,500, up 5.8% in 12 months.1

FED MINUTES EMPHASIZE THE “GRADUAL”

Minutes from the January Federal Open Market Committee meeting appeared Wednesday, and while FOMC members saw “substantial underlying economic momentum,” they also stated that “gradual policy firming would be appropriate.” To many investors and economists, that hinted at a March rate increase. The CME Group’s FedWatch tool puts the odds of a quarter-point March move at 83.1%.2,3

OIL ADVANCES for a SECOND STRAIGHT WEEK

A 1.2% Friday climb left WTI crude 3.3% higher than it had been seven days earlier on the NYMEX. Oil settled at $63.55 a barrel Friday, still down 1.8% for February.4

STOCKS RISE

Across February 20-23, all three major Wall Street benchmarks advanced. The Nasdaq Composite

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Keeping This Market Correction in Perspective

 

After 20 months of relative calm, this volatility needs to be taken in stride. 

Are you upset by what is happening on Wall Street? It may help to see this pullback within a big-picture context. Corrections have become so rare as of late that when one occurs, emotion threatens to influence investment decisions.

So far, February has been a rough month for equities. At the close on February 8, the Dow Jones Industrial Average was officially in correction territory after a slide occurred, which included two 1,000-point descents within four days. Additionally, nearly every U.S. equity index had lost 7% or more in the past five trading sessions.1,2

This drop is troubling, yes – but not as unsettling as it may first seem. The market has been up for so long that it is easy to dismiss the reality of its occasional downs. Last year’s quiet trading climate could legitimately be characterized as “abnormal.”

Prior to this current retreat, the S&P 500 had not fallen 5% from a peak since June 2016. It went more than 400 trading days without such a slump, setting a record. In this same calm stretch, the index also went through its longest period without a dip of 3% or more.3

During a typical year, there are five trading days when equities descend at least 2%, plus one correction of about 14%. On average, equities take roughly a 30% fall every five years.4

This year, the kind of volatility normally seen in the market has returned. It may feel like a shock after so much smooth sailing, but it is the norm – and while the Dow’s recent daily losses are numerically unprecedented, they are also proportionate with the level of the index.

A few things are worth remembering at this juncture. One, Wall Street has had more good years than bad ones, as any casual glance at its history will reveal. This year may turn out well. Two, something similar happened in the mid-1990s – a long, easygoing bull run was suddenly disrupted by major volatility. That bull market kept going, though – it lasted four more years, and the S&P 500 doubled along the way. Three, this market needed to cool off; in the minds of many analysts, valuations had become too expensive. Four, the economy is in excellent shape. Five, earnings are living up to expectations. Last week, Thomson Reuters noted that 78% of the S&P firms that had reported this earnings season had topped profit forecasts.1,3

Wall Street may be turbulent, but you can stay calm. You could even look at this as a buying opportunity. Assuming this is a correction and

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After a Superb January, the Dow Fell More Than 1,000 Points Last Week

WAGE GROWTH PICKS UP AT LAST

In January, average hourly pay was 2.9% higher than it was a year earlier. That was the key takeaway from the Department of Labor’s latest jobs report, which noted the addition of 200,000 net new workers last month. In January, the headline unemployment rate stayed at 4.1%; the broader U-6 rate, which counts the underemployed, ticked up to 8.2%.1

ISM: FACTORY SECTOR IN GREAT SHAPE

The Institute for Supply Management released its January purchasing manager index for the manufacturing industry last week, and the reading of 59.1 surpassed the forecast, made by economists surveyed by MarketWatch, by half a point. A reading approaching 60 indicates significant expansion.2

HOUSEHOLDS SPEND MORE, REMAIN OPTIMISTIC

Personal spending and incomes rose 0.4% in December, according to a Department of Commerce report. The Conference Board’s consumer confidence index climbed 2.3 points to 125.4 in January, while the University of Michigan’s final January consumer sentiment index came in at 95.7 Friday, 1.3 points above its prior reading.2

STOCKS SLUMP AS FEBRUARY BEGINS

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Stock Indices Continue Their March Higher

THE ECONOMY EXPANDED 2.6% in Q4

The Department of Commerce’s first estimate of fourth-quarter gross domestic product was 0.6% below the Q3 number, but still well above the 2.1% rate the nation has averaged in the recovery from the Great Recession. America saw 2.3% economic growth in 2017, according to the report.1

  

HOME SALES RETREATED DURING THE HOLIDAYS

Winter chill possibly encouraged the decline as much as high prices and low inventory. The National Association of Realtors noted a 3.6% slump in resales in December, while the Census Bureau said that new home purchases fell 9.3% last month. Existing home sales improved 1.1% during 2017; new home sales, 8.3%.2

  

OIL REBOUNDS, REACHES $66

WTI crude advanced 4.5% in five trading days, settling at $66.14 Friday on the NYMEX. That was its highest close in more than three years. Crude prices have risen for five of the past six weeks.3

   

KEY STOCK INDICES CLIMB

Wall Street’s big three performed well last week,

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