While January saw a continuation of the low-volatility, steady-return stock market environment experienced throughout all of 2017, the first few trading days of February have been a completely different story.
Shortly after reaching the longest streak in the history of the S&P 500 without a 5% correction, the Index has faltered and is down 7.79% from its recent all-time high level (as of the close on Monday, February 5). On Monday alone, the S&P 500 dropped 4.10%.
Though this abrupt drop seems severe, it is important to view everything on a relative basis. In fact, since the beginning of the current bull market which started in March 2009, the S&P 500 has experienced a 10% or higher correction in four separate years (2010, 2011, 2015, and 2016). Each of these occasions happened for a different reason, but in all four years, markets stumbled for a quick pullback before continuing to rally higher backed by strong fundamental data.
So what exactly caused this recent rapid drop in the markets and what can we expect going forward from here?
The selloff officially started on Friday, following a strong jobs report which caused investors to speculate the Fed may be more aggressive than expected with rate hikes this year. This pushed stocks lower as higher interest rates generally hamper economic growth in the long-term. However, the selloff continued on Monday for seemingly no reason other than investors taking gains from an abnormally strong year in 2017 and algorithmic/computer-based trading signaling shorter-term strategies to shift more defensive due to the sudden spike in volatility.
Looking ahead, many of FormulaFolios’ indicators are still pointing to a slightly higher-than-average likelihood of continued economic growth and market increases as many fundamental economic indicators (labor market, corporate earnings, credit spreads, etc.) remain positive. Furthermore, though short-term market momentum has turned somewhat bearish, long-term momentum is still displaying bullish signs; the S&P 500 is still up 44.82% since mid-February 2016.
While the past few days of market returns have been frustrating for many investors, this exemplifies why it is imperative to stay committed to our long-term financial goals. At times like this, it is very tempting for investors to make a knee-jerk decision and panic sell. These short-term market movements can be debilitating when it comes to making sound, logical investment decisions. By sticking to a strategy and maintaining a broad range of asset classes in your portfolio, you can avoid chasing short-term movements and news, and in turn your probability of success is improved greatly.