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A Wild Week


Friday, February 9, 2018

Terry L. Blaker, SrVP and Director, Investment & Portfolio Management

Well, folks, we finally got the correction that everyone said they were expecting and that most even said would be “healthy” for the market. From the high on January 26, stocks are now down by the 10%, which has traditionally defined a correction. I enjoyed the commentary from Mason King of the Indianapolis Business Journal that also said a correction is healthy. Mason said: “Don’t panic. The stock market has contracted by about 10 percent in the last week (including Thursday’s plunge), which is the classic definition of a correction, and corrections are healthy. It’s like sneezing. You get something irritating up your snout, and your body reacts by convulsing and expelling the contagion—except, in the case of a correction, thousands of dollars shoot out of your nose. Here’s what happened in a nutshell: Last week we heard some great news—wages finally are rising at a decent pace, which unfortunately can drag on companies’ bottom lines and trigger inflation. Policy makers combat inflation with higher interest rates, but higher interest rates can slow the economy. So investors freaked. That’s the simple (perhaps too simple) explanation for the correction.”

I think Mason nailed it pretty good. The stock market clearly needed to take a breather after soaring 37% since the election and 6% in January alone. As I said earlier, there is no way to know how much more stocks may fall or how long volatility will be in the news, but we continue to believe that a strong and growing U.S. economy, growing corporate earnings, stimulus from tax reform, a fragile-but definitely better international economy, and still very modest interest rates will all support stocks and limit the damage from this downdraft. Stock traders will eventually get over their little temper tantrum and soon accept that slightly higher inflation and interest rates are really a good sign that we are finally past the point of needing the massive fiscal and monetary stimulus put into place during and after the “Great Recession of 2008-2009”. We’ve had a long period of low volatility; now we are in a period of high volatility. History would tell us that typically volatility hangs around for a while. CNBC and the rest of the media may over-sensationalize this drop. Turn off the TV if you must. This is just normal market behavior after a very nice run-up over the last two years. I know it feels terrible. All corrections do. But I believe this is just that – a correction - and not the beginning of the end.

Also in the news, just hours after the government went into yet another government shutdown, Congress passed a budget agreement early Friday that would extend the current level of federal funding until March 23. The bill would also bump limits on defense and non-defense spending by about $300B over the next two years. Although Congress once again kicked the can down the street a bit more, we’re all hoping that Congress can finally agree on a longer term budget.

Weekly wrap-up: It was a wild week, with global stock markets posting sharp losses. Today was no exception. However, U.S. stocks ended their worst week in two years on a better note. After gyrating all day, the Dow closed at 24,191, up 334 points or 1.40% today, but fell 5.2% for the week. The S&P 500 gained 38.55 or 1.49% to close at 2619.55 today and was off 5.1% for the week. The NASDAQ rose 97.33 or 1.4% to end the day at 6874.49 and lost 5.0% for week. Year-to-date, the Dow is off 2.1%, the S&P 500 is down 2.0% and the NASDAQ is off just 0.4%.

Terry Blaker, SrVP and Director, Investment & Portfolio Management 

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