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?
Well, you didn’t expect that to last forever, did you?
Everybody likes it when stocks keep going up (it even begins to feel normal), but deep down we know that sooner or later the merry-go-round has to stop. This was the week that happened.
The Dow Jones Industrial Average lost over 1,000 points since last Friday’s close, plunging more than 600 points today. The S&P 500 index slid more than 100 points, as both major indexes lost 4% of their value. The Nasdaq Composite index shed 250 points, a 3.4% decline from its all-time high last Friday. As a whole, stocks had their worst week in two years.
Somebody has to be at fault for this, right? Pundits blamed ten-year Treasury notes, whose yields crept above 2.8% by week’s end. A good jobs report, where year-over-year wage growth approached 2.9%, was also fingered as a culprit, since both data points suggested a quickening of the economy and inflation. That could ultimately lead to the Federal Reserve raising rates faster than the three times this year investors currently expect.
So, that settles it, doesn’t it?
President Donald J. Trump wants a strong economy, a strong military and a strong U.S. dollar. Well, maybe not.
When the Populist in Chief met the elite of the elite in Davos, Switzerland this past week, he told the assembled hedgies, private equity titans, pundits and heads of state that “America is open for business.” Had it really been closed for business before January 2017?
But on a key issue, the Trump Administration managed to speak out of both sides of its mouth.
Treasury Secretary Steven Mnuchin, who always seems to have one finger in the air to track the wind’s direction, declared, “Obviously a weaker dollar is good for us as it relates to trade and opportunities,” he said. Obviously, the dollar had its biggest one-day decline in nearly a year on global currency markets.
The word “weaker” is not in the alpha male president’s vocabulary unless he’s criticizing an opponent. “The dollar is going to get stronger and stronger, and ultimately I want to see a strong dollar,” he said. “Our country is getting so economically strong and strong in other ways, too.” That’s five “strongs” in two sentences, but who’s counting?
So, what happened next and what does it mean?
It’s good for everyone when stocks keep rising.
On Wednesday the Dow Jones Industrial Average closed above 26,000 for the first time ever, while the S&P 500 registered its first post-2800 close. The Dow and S&P sold off a little bit, but the Nasdaq Composite index topped 7300 in Friday’s trading. Another day, another milestone, it seems, in this market.
This is when people like me start worrying about what could possibly go wrong, and if you scan the headlines, you’ll find two big concerns—bonds and bitcoin (and other cryptocurrencies).
As I wrote here and in my MarketWatch column last week, bond yields have risen steadily over the past few weeks as investors have sold out of fear of a stronger economy and looming inflation. (When investors sell, bond prices fall and yields rise to attract buyers.) Some have warned that could cause a big correction in stocks.
The other big news is bitcoin, which fell Wednesday (just as stocks peaked) to $9,200, having peaked at $19,500 per coin at the height of the frenzy in December. On Friday, it had rallied back to $11,600.
Do either of these pose any danger to stocks?
This week, despite a strong auction, the benchmark ten-year U.S. Treasury note’s yield hit a nine-month high of 2.6% Wednesday. The alarm bells started ringing.
The day before, former bond king Bill Gross, whose track record has been mixed at best, especially during the latter years of his tenure with Pimco, declared a bear market in bonds had been “confirmed” because rate increases had broken the multiyear down trend in yields. (He later said, “bonds, like men, are in a bear market,” but I won’t go there.)
On Wednesday afternoon I spoke with technician Craig Johnson, who has a consistently good long-term bullish track record. He told me yields were heading higher and the 36-year-long bull market in bonds was probably over.
Meanwhile, on Thursday, the Dow Jones Industrial Average, the S&P 500 index, and the Nasdaq Composite index all hit new all-time highs, and show no signs of stopping.
As I wrote in MarketWatch, Johnson urged clients to take some profits in advance of a potential 20% correction in stocks brought on by increases in bond yields.
Should you sell?
If I had to compare 2017 in the markets to one thing, it would be a roller coaster that kept rising with few dips or drops.
That meant fewer thrills and chills for sure, but it certainly made investors richer.
As I write this, my last market commentary of the year (we’re taking next week off), the Vanguard Total Stock Market Index ETF (VTI) had risen 21% for the year, while the Vanguard FTSE Developed Markets ETF (VEA) was up a bit more, 24% through Thursday.
Emerging markets and technology stocks did even better: The iShares MSCI Emerging Markets ETF (EEM) has gained 33% while the Technology Sector SPDR ETF (XLK) has advanced 36% thus far in 2017.
It was, in short, a good year to take risk, and the CBOE Volatility index, the VIX, reflected that. It spiked three times this year above 15—in April, May, and August—but didn’t stay there long. What I call the market’s complacency index spent most of the year near historic lows, in single digits. As I write this, it’s around 9.5.
So, should we all just relax and count our profits?