After almost two years of low volatility, investors have been reminded that stock prices do fluctuate in value. U.S. stocks last week suffered their largest weekly drop in roughly two years and the sell-off continued Monday with the largest drop since 2011. Globally, the trends were the same with the Stoxx Europe 600 posting its worst week in nearly two years. After today’s 4% decline, the Dow Jones Industrial average is still up over 20% in the past year.
Rising wages might be causing this sell off as it could be a precursor to future inflation. Rising inflation could prompt central banks to tighten monetary policy faster than expected. The last time we witnessed a correction of this magnitude was in 2016 when the stock market sold off 10% prior to rebounding. It is important to be reminded that over the last 36 calendar years stock prices have been positive in 29 of those years with corrections in almost every year averaging 13.8%.
So far in 2018, we have experienced continued global growth, strong corporate fundamentals and tailwinds from the tax reform bill. Inflation is still very low but we are beginning to see some early signs of potential Inflation in the future. The U.S. dollar is down, which pushes up oil and import prices. We believe the impact of the Tax Cuts and Jobs Act of 2017 will continue to help the economy in 2018 which should move long term interest rates higher and force the Fed to continue raising short term rates. U.S corporate earnings continue to rise. With about half of the S&P 500 companies who have reported fourth quarter earnings, 80% have beaten analyst revenue expectations which is the highest since the third quarter of 2008. The new tax plan should help boost profits in the quarters ahead.
Real GDP increased at an annual rate of 2.6% in the fourth quarter of 2017. In January, the unemployment rate was 4.1% for the fourth consecutive month and total nonfarm payroll employment rose by 200,000 workers. The Conference Board consumer confidence number increased to 125.4 from 123.1 in January, suggesting that consumer confidence started the year on a strong note. Though the ISM manufacturing index declined in January from 59.3 to 59.1, it is still well above historical averages and consistent with high GDP growth.
Internationally, most economies are growing and we expect this trend to continue. Europe which is the largest representation within our international portfolio is experiencing 2.7% year-over-year growth, which is faster than the U.S. In addition, manufacturing is growing at its fastest pace since 2011.
Using history as a guide, we were overdue for a correction in stock prices and declines of this magnitude are not uncommon. We believe that the economic trends of 2017 are largely intact as we move into 2018. We continue to believe that a long-term perspective and a diversified portfolio will benefit investors. If you are a client and would like further detail on these topics or anything else, please don’t hesitate to call or email us. If you are not a client, but would like more information on Callan Capital’s wealth management services, please contact us at (858) 551-3800 or visit www.callancapital.com.
Past performance does not guarantee future results, which may vary. This material is provided for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. For more information regarding Callan Capital, please refer to our most recent Form ADV Part 2A which may be found at adviserinfo.sec.gov.
Callan Capital does not provide individual tax or legal advice, nor does it provide financing services. Clients should review planned financial transactions and wealth transfer strategies with their own tax and legal advisors. Callan Capital outsources to lending and financial institutions that directly provide our clients with, securities based financing, residential and commercial financing and cash management services.
S&P 500®: Standard & Poor’s (S&P) 500® Index. The S&P 500® Index is an unmanaged, capitalization – weighted index designed to measure the performance of the broad US economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Dow Jones Industrial Average, is a stock market index of thirty major companies.
The STOXX Europe 600, also called STOXX 600, SXXP, is a stock index of European stocks designed by STOXX Ltd.. This index has a fixed number of 600 components, among them large companies capitalized among 17 European countries, covering approximately 90% of the free-float market capitalization of the European stock market (not limited to the Eurozone). The countries that make up the index are Austria, Belgium, Denmark, Finland, France, Germany, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.