Lindsey Report March ’18

After the equity markets enjoyed a year in 2017 with historically low volatility, and began 2018 in similar fashion, things changed rapidly in February. Volatility returned and equities entered “correction territory” (-10%) on the 8th, as measured by the S&P 500, Dow and Nasdaq (CNBC).

For instance, one measure of volatility is the number of days where the S&P 500 closes up or down more than 1% in a calendar year. In 2017, this only happened eight times with four days on the upside and four on the downside. To put in perspective, since 1926, there have only been two years with fewer than eight 1% days (Marketwatch), but the average number of 1% daily moves has been more than 50/year, dating back to 1958 (Yahoo Finance).

Therefore, it was and is not unexpected to see this type of volatility returning to the markets. However, when it returned in February, it did so in a hurry. In February alone there were 12 days where the S&P 500 had a 1% move (seven up and five down) (MSN).

Likely, the two most notable days were down (February 5th and 8th) where the Dow fell 1175 and 1032 points, respectively. On a point basis, these were the two largest drops on record. While that fact was widely reported, it should be noted that on a percentage basis the -4.6% and -4.15% respective losses, while significant, would not crack the “top 20” worst percentage losses. The top spot on that list remains Monday, Oct 19, 1987 (or Black Monday) when the Dow fell 508 points, translating into a loss of 22.61% (WSJ).

Although there are many reasons for a return to volatility and a pullback in equities, it would appear that a significant contributor this time has been a healthy economy. Ironically, the concern is not that the economy is struggling; rather, that the economy may be strengthening. Why would this be a concern? Well, it sounds like an oxymoron, but a better economy could lead to higher inflation, which in turn may lead to higher interest rates, which may lead the Federal Reserve to raise rates quicker than expected. Simply put, just the fear-of-inflation or higher interest rates can be enough to spook the equity markets. That’s how I assess February.


The opinions voiced are for informational purposes only and are not intended to provide specific advice to any individual. To determine which investments are appropriate for you, consult myself prior to investing. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in this commentary may not develop as predicted and there can be no guarantees that strategies promoted will be successful.

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