Equity markets finally took a breather; and as a qualitative observation, volatility feels like it is starting to return after a two year absence. Throughout January, equities, currencies, crude, and rates all had increasingly large, intra-day price moves (both positive and negative). Today’s 2% sell-off in equity markets provided the best example of this yet.
Historically, stock market corrections tend to occur when volatility accelerates, and they tend to be in the range of 8%-15%. If today’s drop proves to be the start of such a correction, its origins will be of the best possible kind: strong US employment and wage growth data released this morning. Knee-jerk reactions aside, the higher interest rates that get catalyzed by strong economic growth and moderately rising inflation are positive for equities, not negative. This is particularly true for growth equities, like those that dominate the BTIL and personal portfolios.
Coincident with these macro themes, we remain in the middle of earning season. Over half of S&P 500 companies have now reported Q4 earnings, and a full 75% have beaten already high investor expectations. Further, many companies have increased their 2018 guidance, citing only the US corporate tax changes and not end-market demand. This “sand-bagging” of economic growth leaves ample room for further, positive earnings performance through 2018.
All of this implies that it is a good time to be very focused on your wish-list of investments. Correlations generally increase sharply during market corrections, resulting in good companies getting sold off together with the bad – with a bit of luck, we will see this occur in February.