Today, February 2nd, 2018, the stock market in the United States closes the week with the worst performance in a long time. This has been the markets worst day since the uncertain times brought by the Brexit referendum. On this day, the Dow closed with a decline of 666 points (2.5%). This has also been the steepest point decline since the 2008 financial crisis. Thanks to a strong job report that finally shows wage growth, investors’ concerns about inflation and the bond market have been reignited. Political turmoil in Washington has only added fuel to this fire. Many market analyst point to the clash between Trump and the FBI as the example. Between these two things, it created a sell-off that knocked the Dow way below 26,000. Between both the Dow and S&P 500, they have suffered their biggest weekly drops since early 2016 (roughly 4% each). However, this pales in comparison when the Dow plummeted nearly 8% on a single day in October 2008. We must also keep in mind that the VIX, a measure of market volatility, soared 55% this week. Again, I can not stress enough that this is due to the strong job reporting of (200,000 jobs in January) and the fastest wage growth pace that has been seen in eight years. Keep in mind, if wages grow too fast, they could eat into Corporate America’s record profit margins. The second fear of investors is that the wage growth could be a sign that inflation, which has been mysteriously low for years, may heat up. This rise in inflation would force the Federal Reserve to raise interest rates faster than the investors would feel comfortable with. These concerns have resulted in 10-year Treasury yield reaching a four-year high of 2.85% on Friday, while it was at about 2.4% at the start of the year.
This week’s performance has dented a very small fraction of the gains since the president’s victory in the 2016 election. The Dow and the Nasdaq have climbed more than 40% apiece since the election, the S&P 500 has advanced for 10 consecutive months, and that hasn’t happened since 1959. However, the record earning has not stopped the market from dipping. For example, shares of Alphabet (GOOGL) dropped 5%, even after the tech giant posted its first $100 billion sales year.
So, in conclusion, many stock market bulls have said for a long time that a pause or even a dip would help prevent the market from suffering overheating. However, also remember that Former Fed Chairman Alan Greenspan said this week that both stocks and bonds are in a “bubble.”