published: March, 22nd 2017
Market Update – 3/22/2017
By: Rick Wedell, CIO
Markets obviously sold off yesterday, and we saw a number of “worst day of the year” “is the Trump rally over” “sky is falling” type headlines both yesterday afternoon and this morning. CNBC pre-market was screaming about how the most likely path from here is down. The SPX is off ~2% from its highs a few days ago, and while the selloff seems sharp, it only seems so because we have been in a period of such low volatility for so long. If you look at a 12-month chart and remember what we went through back in April / May of last year, this type of correction actually isn’t all that unexpected.
Chart Source: Bloomberg
In terms of drivers of yesterday’s price action, there is not really all that much to point at. You can certainly argue that there is some increasing realization that the new administration’s policy agenda may be difficult to pass despite a Republican House and Senate. The repeal of the ACA certainly seems to be going frustratingly nowhere, although Thursday’s vote will be more of a litmus test. The “fear” is that if you cannot pass that repeal, how do you get through something that the market actually cares about like taxes or infrastructure. I would argue that the tax issue may be less difficult politically, and infrastructure certainly is, but that’s just my $0.02. You could also argue that both oil prices and the yield on the 10-year treasury, which have recently slid, are indicating a little bit of a slowdown in the growth that we’ve seen recently. We’ve lived with low oil prices for a long time now, but WTI* has seen about a 12.5% correction from the peak roughly 1 month ago, and that will impact both oil exploration / production companies and the industrial businesses that support them. Further, bond prices have rallied and the yield curve has flattened a little, which is not an overly bullish signal to the marketplace. That said, there’s no overwhelming bear narrative being told, other than that valuations are still in the 18x forward range despite the correction, which is still high relative to recent history. In my opinion, sell-offs driven predominantly by “the market is expensive” do not last too long unless another economic catalyst emerges.
*West Texas Intermediate: Benchmark for Oil Pricing
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Content prepared by Rick Wedell. Rick Wedell is not affiliated or endorsed by LPL Financial.
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SPX is the Standard & Poor’s 500 Index which is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.