Market Correction

Stocks plunged today with the Dow shedding over 1,500 points during the day as traders antsy about inflation tried to lock in their year-to-date gains. The markets are down 7% now from their highs set last month. This marked the largest one-day decline in 7 years. So, what is behind this move? Investors were spooked by a few things surrounding the following: the Fed, yields, and profits.

Firstly, there was a change at the Federal Reserve with Jerome Powell taking over for Janet Yellen as the new Chairman. Markets don’t like uncertainty, especially with regards to interest rate policy. Traders had gotten to know Yellen and now they will have to learn the tendencies and philosophies of a new captain guiding monetary policy. If inflation is indeed ticking up, there is a chance this Fed will act aggressively to combat it by raising rates. Traders just don’t know yet how the new Fed will behave and that scares them.

Secondly, yields have been creeping up, especially short-term bonds. This creates a scenario described as a “flattening of the yield curve,” where interest rates at the long end (30-year bonds) are not that much different from yields on the short end. Every recession is preceded by a flat or inverted yield curve.

Thirdly, traders were taking profits. The markets surged in January, recording its best start to a year in 30 years - and that came on the heels of a fantastic 2017. After the markets sold off a bit last week investors were ready with their fingers on the sell button for any signs of more losses to lock in their profits.

Has anything changed? Yes and no. The markets acted like markets again for the first time in a while. Equity investing comes with risk and volatility and those are two things we just haven’t seen in well over a year. So, the change is that normality has returned. Markets are supposed to rise in spurts and fits, not jump up parabolically. Fundamentally, nothing has changed. The economy is growing at a steady and increasing rate, corporations are flush with cash, earnings growth is strong, corporate debt-to-equity is very low, and interest rates (though rising) are still near historic lows. There is no reason to think that a year from now, let alone 3-5 years from now equity prices will be lower than they are today. Take these days in stride and remind yourself that market moves like this are normal and expected.