February – 2018 Newsletter

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Index Month / Year to Date


Dow Jones +5.87%/+5.87%
S&P 500 +5.72%/+5.72%
NASDAQ +7.40%/+7.40%
10-Yr Treasury yield was 2.40% at the end of 2017 and 2.70% at the end of January

Source: bloomberg.com

Markets:

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.

All of this happened on the heels of the stock market’s second-best January in history, in which it added another six percent to 2017’s 20 percent growth. As to whether the February plunge continues and turns into the long-overdue major market correction I’ve been talking about for several years now remains to be seen. The more significant question for fixed-income investors who’ve already reduced their stock market risk is whether the headwind that emerged in conjunction with the market’s elevated January numbers will continue or level off.

Actually, this headwind had been building since about mid-year 2017, when long-term interest rates first began creeping up. Then, in January, the 10-Year Treasury yield jumped from 2.4 to 2.7 percent and briefly broke above 2.8 percent in early February. While I believe it could notch up a bit more, I also believe that, considering all the factors at play, it will hit a pretty tough ceiling at just over 3 percent, if it makes it there. I’ve seen this before in my career: when rates start rising, there’s a knee-jerk reaction that triggers a sell-off, and the bond market, as a whole, gets “oversold.” Then, suddenly, everything levels off again, and half what was lost in the sell-off comes back.

The bottom line is that all of this is quite normal. The bond market, stock market, interest rates—they all zig and zag. Trying to predict those zigs and zags and make investment decisions on that basis is called “timing the market,” and statistically, it’s a poor strategy.

Fixed-income investing certainly isn’t about timing the market. It’s about understanding that the bond market (along with the stock market) fluctuates, but it doesn’t fluctuate nearly as dramatically on the upside or the downside. More importantly, with fixed income, you can count on your assets to continue generating the income you need to enjoy retirement and achieve your goals—regardless of those fluctuations!

Dave Scranton

  1. Myles Udland, “S&P 500 falls 4.1%, worst decline since 2011,” Yahoo Finance, last modified on February 5, 2018 

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