The Froth Is off the Rose


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?

Well, no. The data we saw this week were no surprise: Ten-year rates have been creeping up for weeks and we’ve been waiting for months, even years, to see the first signs of wage inflation. I’ve written here that ten year yields have gotten as high as 3% only to retreat again and that the real inflection point is 3.25-3.5%. We’re nowhere near that yet, but we’re paying close attention.

Actually, I think investors are selling stocks because they’re simply tired of buying them and needed an excuse to take profits.


  • Until Tuesday, the S&P had gone 310 trading days—more than a year—without back-to-back 0.5% declines.
  • As of last November, the market had gone 388 trading days without a 3% decline, the longest such streak ever.
  • As of mid-January, it had gone more than 100 trading days without a 1% decline.
  • Last Friday, Sam Stovall, chief investment strategist of CFRA, reported that the S&P 500 had gone 564 calendar days since the last correction of 5% or more. That was the longest such stretch since 1945.

Investors were simply too lazy and complacent. The CBOE Volatility index, the VIX, traded below 10 as recently as January 11th. It had shot up to 17.50 by Friday’s close.

Stocks had just gone up too much and too predictably. They wanted to go down and potential buyers lacked the conviction to “fight the tape.”   Sometimes, the simplest explanation is the best.