Yesterday’s 1,175 point decline in the Dow Jones Industrial Average is the largest single-day point drop in history, but on a percentage basis (-4.6%) we have witnessed far worse. During the one-day crash of 1987 stocks declined 22%. Much like the crash of ’87, Monday’s sell-off came at the beginning—literally on the very first day—of Jerome Powell’s tenure as Chairman of the Federal Open Market Committee. In October 1987, the market severely tested Alan Greenspan after two months on the job and, in September 2008, Ben Bernanke was tested two years into his term. Chairman Powell’s response to the markets will be closely watched and it brings us back to why this market sell-off began in the first place.
The two-day decline (the market looks set to extend its losses this morning) has not occurred in response to any specific headline. The recent rise in bond yields is being blamed, but the magnitude and severity of Monday’s action was more “technical” than it was “fundamental.” A routine pullback that started last week quickly snowballed into a mechanically-driven and technical sell-off as the CBOE Volatility Index (VIX) spiked to over 40. We don’t know where the market will settle out in the near-term, but we do believe this market was driven down by algorithmic trading (forced selling) on Monday afternoon.
For the first time in many years, Main Street may be stronger than Wall Street. The economy is certainly stronger than at any point since 2007. This is creating a conundrum for investors having to grapple with the prospect of higher interest rates. Since early December, bond yields are up 70 basis points (0.70%) on average. Yields are up for a good reason. The economy is growing closer to 3% and consumers’ disposable income is set to rise more than 5% in 2018. Stocks may be down, but in our opinion, they are not “down and out.” Stocks are down in response to this sharp rise in yields, but in the long run the secular bull market is intact because Main Street is strengthening.
While the Dow is down 8.5% from its peak and the S&P 500 is down 7.8%, we should not lose sight of the fact that these markets are still up over 20% year-over-year and more than 30% since the 2016 election. Yesterday’s wild market decline only erased the gains investors have enjoyed since the beginning of the year. This is also the first meaningful market decline since January 2016. Due to the amount of time that has passed, and the recent lack of market volatility, this decline may feel more severe than it truly is. This pullback has also been highly anticipated, but its anticipation does not make it feel any less painful. Investors have to be willing to accept the short-term gyrations, no matter how irrational and painful they may be, to enjoy long-term rewards.
The opinions expressed herein are those of Haverford. Past performance is no guarantee of future results. No forecasts are guaranteed. Views and security holdings are subject to change at any time based on market and other conditions. These publications are for informational purposes only and should not be construed as investment advice or recommendations with respect to the information presented.