MarketWatch 2018

October marked the return of major some major volatility to the stock market for the first time since late Spring. Over two dramatic days, on October 10th & 11th, the Dow shed over 1,300 points, while both the S&P 500 and Nasdaq suffered similar losses.* Volatility continued over the next several weeks, and by October 26th the Dow Jones Industrial Average was down 9% from its record high for the year, while both the Nasdaq and S&P 500 were down more than 10% and officially in correction territory.**

September may have marked the start of fall, but for the financial markets it was a month in which everything seemed to rise. On September 20th, the Dow Jones Industrial Average finally managed to surpass the peak it hit in January and nudged all the way to a new record of 26,743 one day later before leveling off again. On September 18th, the yield on the 10-year Treasury rate surpassed 3 percent for the first time since May, making it to 3.10 percent before dropping slightly again.* Finally, on September 26th, the Federal Reserve raised short-term interest rates for the third time this year, to a range of 2-to-2.25 percent. It also reaffirmed its plan for one more rate hike in December, and as many as three more in 2019.**

One could argue the stock market had a relatively good month in July, but that’s only because the bar for the year has been set pretty low. After plunging to 24,117 on June 27, the Dow Jones Industrial Average clawed its way back up to a high of 25,527 by July 26 before leveling off again. In the meantime, volatility remained high as Wall Street continued to closely watch the impacts of Donald Trump’s trade policies and the Federal Reserve’s moves around interest rates.

One could argue the stock market had a relatively good month in July, but that’s only because the bar for the year has been set pretty low. After plunging to 24,117 on June 27, the Dow Jones Industrial Average clawed its way back up to a high of 25,527 by July 26 before leveling off again. In the meantime, volatility remained high as Wall Street continued to closely watch the impacts of Donald Trump’s trade policies and the Federal Reserve’s moves around interest rates.

The last month of the second quarter played out very much like the preceding four months: with record volatility in the overvalued stock market, long-term interest rates holding at their resistance level, inflation still below 2 percent, and the Fed pretending not to notice any of it.

The Dow Jones Industrial Average opened June at 24,635 and finished nearly 400 points down from that, but in between, it climbed nearly 700 points higher and fell more than 500 points lower.1 The S&P 500 and Nasdaq were equally volatile, thanks mainly to escalating concerns over Donald Trump’s trade policies and the threat of a full-blown trade war.

The story of the financial markets for May was—let’s all say it together now—volatility! That should come as no surprise because volatility has been the story for most of the year, and it’s likely to continue to be the story for some time to come. Once again, the last few days of the month were typical of the year overall. On May 29, the markets plunged on fears over political turmoil in Italy and renewed worries over trade, with the Dow Jones Industrial Average shedding nearly 400 points. On May 30, worries eased, and the Dow gained back nearly all those losses, only to lose half of them again on May 31 with a 221-point drop. Talk about a roller coaster!

The dramatic market volatility I discussed in last month’s newsletter continued throughout April as the yield on the 10-Year Treasury rate topped 3 percent for the first time since 2014. Fears of rising interest rates and inflation helped drive the volatility along with uncertainty about how aggressive the Federal Reserve might be in its efforts to “normalize” monetary policy under new chairman Jerome Powell.

Though Powell took a “dovish” tone in an April speech in Chicago and expressed optimism that inflation will stabilize at around 2 percent, Wall Street remains nervous.1 That’s because some analysts believe there are several factors that could push inflation higher than the Fed’s target—and even Powell has admitted that if that happens, it could force the Fed to “raise short-term rates too quickly and cause a recession.”

The markets remained high in April but were also largely disconnected from economic reality. Reported corporate earnings reflected an annualized growth rate of just 0.7 percent for the first quarter of 2017.* That’s down from 2.1 percent growth in the fourth quarter of 2016, and even though both of those are positive numbers, neither is anywhere near 4 percent. Annual GDP growth of 4 percent is what Donald Trump has promised if his tax plan and other economic policies are approved—and Wall Street remains irrationally optimistic that he can, and will, deliver.

As expected, the historic stock market drop that kicked off February gave way to a month of high volatility—a pattern I believe will continue. Though the markets regained some of the losses suffered in that 10 percent correction in the first week of February, they closed lower in a turbulent session on the final day of the month.

Your SIS newsletter is coming to you a bit later this month because just after we prepared the letter at the end of January, the markets took a dramatic turn in early February, which I wanted to touch upon. The year-to-date stock market numbers above were severely impacted after the first few trading days in February when the major market indices all suffered historic drops.1 Concerns over inflation, debt, and rising interest rates were all cited as factors in the steep sell-off.