February 6, 2018

Why The Stock Market Drop Is Less Scary Than It Seems

Company earnings exceeded expectations for many stocks during 2017. The same reporting, companies exceeding expectations occurred in January of this year but, the markets rose 10 % in one month. What was lost in market value the last few days was the gains that were created during the month of January 2018.

The fundamentals of the market remain solid. As we have mentioned throughout all of 2017 is low interest rates and low inflation can keep the market at its current values. Those two items have not moved. The drops seen the last few days show that signs of inflation and interest rates rising (the treasury yield going up meaning bond values going down is one sign) caused this volatility.

Why such a large drop Monday? Program trading; computers designed to buy or sell based on algorithms coded into them start the ball rolling and human intervention was necessary to reverse a 1600 point drop in the DOW to the 1100 drop it finished at.

Take a look at the following chart from JP Morgan: JP Morgan Annual Return and Intra-Year declines. Despite intra-year drops annual returns have been positive in 29 of the 38 years.

The NY Times published this article yesterday, Context Matters. The Stock Market Drop is Less Scary Than It Seems. The market drops can easy be misled by big point swings after a long period of quiet in global markets. This bad news for stock investors seems to be driven in part by good news for workers. Click on the article to read it in its entirely.

Please feel free to contact our office with any concerns that you may have.

Ted Sarenski

CPA/PFS, CFP™, AEP
Chief Executive Officer & President

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