Global stock market performance last week reminded us risk is an inherent part of investing. The S&P 500 dropped 3.9%. Global stocks dropped slightly less, as the MSCI ACWI fell 3.4%. The Bloomberg BarCap Aggregate Bond Index continued its decline by dropping 0.9%.
Carson Group Commentary
Volatility returned to the stock market after a long absence. After going approximately five months without a 1% decline, the market saw two in the same week. Investors should be thankful the wakeup call involved a relatively small decline.
To put it in perspective, even after a down week, the S&P 500 is still up 3.3% this year. Earning just 1% per month produces above-average annual returns, so 2018 is still off to a great start.
Investors should take the opportunity to examine the risk of their portfolios and their own tolerance for volatility. During this amazing market run, portfolios may have crept higher in risk as the more aggressive portions of the portfolio generated high returns.
For regular readers, this isn’t new advice. We’ve shared numerous charts showing how low volatility has been, predicting it would move higher, and encouraging readers to prepare for potential downturns. Our analysis of the decline is below, along with a link to an article covering details of the employment report that triggered Friday’s decline.
Key points for the week
- Markets declined sharply on concerns over inflationary wage growth.
- Even with the decline, 2018 has been a great year for stocks.
- Weeks like these are a normal part of investing.
Carson Group Analysis
It was good news for America’s workers that put pressure on the markets this week. The U.S. added 200,000 jobs in January, while holding the unemployment rate at 4.1%. Most importantly, wages grew by an annualized rate of 2.9%, the greatest wage growth since mid-2009.
The faster rate of wage growth undercut some of the foundational elements that have supported this bull market. After a long recovery, the economy seems to be approaching the level of unemployment where wage and inflationary pressures are building. Wage pressures could reduce high corporate profit margins by raising the cost of labor. Higher inflation would push the Federal Reserve to raise rates more quickly than expected, increasing both the cost of capital and interest expense.
The economic news and recent Fed communication raised the possibility of four rate hikes this year, which is more than the market expected. Economies can tolerate higher wage pressures as long as output-per-worker increases. Unfortunately, economic data this week showed productivity dropped last quarter.
There weren’t a lot of places to hide from this week’s decline. While bonds dropped less than stocks, increased inflation is a risk for both asset classes, and bonds offered little protection from the decline. International stocks did better than the U.S. but also declined.
Looking forward, international markets seem better positioned if wage pressures increase in the U.S. Unemployment rates are significantly higher in Europe, and faster growth would be less likely to lead to inflation and higher rates.
Fun story of the week
How would you like to make $10,000 in an hour? Well, all you have to do is take Equifax to small claims court. Equifax was responsible for a data breach that gave hackers information, which included social security numbers, to more than 145.5 million people. Unfortunately, you have to prove how you have been affected by the breach. Nevertheless, people are still winning their cases, providing a little justice against the big corporation.
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and 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. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 INDEX
The Standard & Poor’s 500 Index 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.
MSCI ACWI INDEX
The MSCI ACWI captures large- and mid-cap representation across 23 developed markets (DM) and 23 emerging markets (EM) countries*. With 2,480 constituents, the index covers approximately 85% of the global investable equity opportunity set.
Bloomberg U.S. Aggregate Bond Index
The Bloomberg U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.