State of the Stock Market Analysis for the Week Ending on February 3, 2018 Dow Pulls Back 666 Points 2-3-18)

All You Need Is Jobs

What started out with a great jobs number before the bell on Friday quickly turned into a tough day for the stock market. The 200,000 new jobs created in January topped expectations of 190,000, as well as December’s 160,000, and that positive news sent the stock market south. The yield on the 10-year U.S. Treasury rose to around the 2.85% level, which was enough to bring in the sellers in a big way all day long. This is a very extended market that saw its start following the November 2016 election. So a good, old-fashioned pullback was probably long overdue. The January gains we witnessed were pretty amazing. So again, a sharp pullback in the Dow of 666 points or 2.5% was not all that surprising.

Hourly wages rose 0.3% in January, and that was above the 0.2% that economists had expected, so suddenly the thought of wage growth had the inflation birds flying in circles. December wage growth was 0.4%, so seeing wage growth remain strong in January had many economy watchers thinking that inflation was on the way. The tough part of wage inflation is that it is difficult for entities like the Federal Reserve to cool it down once it takes hold. We have seen inflation in the past few years in housing, healthcare, and college tuitions, but now that workers are making more money, the stock and bond markets are in a bit of a tizzy.

The overall selloff in equities this week was sharp, and for the week, the Dow was down 4.1%, the Nasdaq slid 3.5%, and the S&P 500 lost about 3.5%. It was a rough week for investors, but we have to keep in mind how far and fast stocks have risen during the past year, and in January in particular. We were beginning to see the major indices post parabolic-type rises, and we even had Alan Greenspan (the Maestro) chime in that he was seeing “bubbles” in both the stock and bond markets. Like the old, famed EF Hutton advertising phrase, “When Greenspan talks, People Listen.” Let’s hope Greenspan comes out next week and has a little more of a bullish tone.

What had investors worried yesterday was not so much any single event. Earnings have been strong, which signals a vibrant economy that could be getting a little hot. The Federal Reserve has been working slowly to “normalize” short rates back to higher levels, but the rise in long rates in the U.S. and even Germany is maybe signaling the Fed that it is time to raise rates more aggressively in 2018. Historically, when the Fed raises rates, the stock market takes it in stride. When the economy remains strong, however, the Fed tends to keep raising rates. That makes “risky” assets less attractive, and that can eventually wallop the stock market and assets like high-yield bonds.

We have only had a brief, one-week pullback in the stock market, so one week does not guarantee a new trend. As we have stated, it has been a long time since the stock market has dropped on “good” economic news, so we will see what happens in the weeks ahead. We have a new Federal Reserve Chairman taking the helm, and it is amazing how new Fed Heads are often “tested by fire” quickly. Alan Greenspan became the Chairman of the Fed right before the October 1987 meltdown, so we send our best hopes and wishes to Jerome Powell as he embarks on his new journey as Chief Fed Head.

What was interesting on Friday was seeing the Volatility Index (VIX) spike to as high as 17.86, before closing at 17.31. Fear levels have been extremely subdued in the past few years, so seeing a little bit of fear reappear is, oddly enough, probably a healthy development for a bull market that had simply become “fearless.” This upcoming week will be interesting, especially since we closed out Friday with the major indices near their lows of the day. It is Super Bowl weekend, though, so that will be a fun break from a very tough week for the stock market. The Gorilla wishes each and all a relaxing weekend, and we will be back in action on Monday!

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