Remember last week, when the sky was falling? Well, it didn’t.
Last week saw two days in which the Dow Jones Industrial Average lost 1,000 points, the only time that’s happened in stock market history. (Because the Dow was so high beforehand, they weren’t the biggest percentage losses ever.) At the intraday market lows, the Dow and S&P 500 index both lost 12% from their January 26th peaks.
Investor sentiment was terrible. From a reading of 78, “extreme greed,” in late January, CNN Money’s Fear & Greed index plummeted to 8, extreme fear. (It was at 11, still extreme fear, on Thursday.) The CBOE Volatility index, the VIX, soared into the high 30s after languishing below 10 for months.
And yet this always looked, smelled, and felt like a correction to me, although even I am surprised by how quickly it’s rebounded.
We’ve seen five consecutive days of stock gains. The Dow has recovered more than 1300 points, nearly half of what it lost during the correction. The S&P now sits 5% below its all-time high.
So, which was more real, the sell-off or the recovery?
Thus far it looks like the recovery.
FactSet Research says S&P 500 companies are reporting very strong 14% earnings growth for the fourth quarter of 2017. Since earnings, present and future, drive share prices, that’s a very good sign.
Economic growth looks pretty good, too, though we’ve yet to see the expected impact from the tax cut President Trump signed into law late last year. Barring some unexpected financial crisis (which I certainly don’t see on the horizon), there’s no sign of a recession for at least the rest of 2018.
Inflation is picking up a bit. The consumer price index (CPI) and core CPI (which doesn’t include food and energy) rose a bit faster than economists had expected—up 2.1% and 1.8% annually. But that’s more a sign of a stronger economy than of a coming inflationary spiral.
If that continues, the Federal Reserve may have to speed up its plans to gradually raise interest rates. (I’m predicting four hikes in the federal funds rate this year.) But rates are historically low.
There are plenty of concerns for the future, like the growing debt burden which at some point may create a big credit squeeze or tie the government’s hands during the next recession. But that’s beyond the next couple of years.
It all adds up to solid fundamentals and reduced complacency and euphoria. We may see some profit-taking and a retest of the lows. But from the outset, I said this was a correction and I’m sticking to my story.