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This Week’s Selloff Could Indicate Volatility

It was a bruising week for stocks. After more than a 7% increase to start the year, global equities gave back half of those gains over the last five days. Investors grew skittish after a string of mostly positive economic events bolstered the case for faster interest rate hikes. This left no room for cover as bonds yields moved higher and virtually all asset classes fell in value, including gold.

Weekly Returns:

S&P 500: 2,762 (-3.9%)
FTSE All-World ex-US: (-4.1%)
US 10 Year Treasury Yield: 2.84% (+0.18%)
Gold: $1,332 (-1.3%)
EUR/USD: $1.246 (+0.2%)

Major Events:

  • Monday – Green Mountain, the maker of Keurig coffee machines, announced it would acquire Dr. Pepper Snapple for $19 billion in cash.
  • Tuesday – Amazon, Berkshire Hathaway, and JPMorgan announced they are forming a new company in an attempt to reduce health-care costs for their employees.
  • Wednesday – Facebook reported a 61% jump in quarterly profit, but said users are spending less time on its network.
  • Wednesday – The U.S. Federal Reserve left interest rates unchanged at its latest FOMC meeting.
  • Thursday – Apple reported record sales of $88 billion in the fourth quarter as higher iPhone X prices offset lower volume.
  • Friday – January employment figures came in better than expected, showing a 2.9% increase in wages.

Our Take:

There were a few events this week that spooked investors. In the last FOMC meeting for Chairwoman Janet Yellen, the central bank left rates unchanged, but took a more hawkish tone in its description of the economy and its underlying strength. The Fed also seemed more confident inflation will move higher over 2018.

Reinforcing this outlook was January’s better-than-expected employment report, which showed wage growth accelerating to the fastest pace since 2009—another indication inflation could pick up. All of this, coupled with this year’s red-hot stock market, pushed treasury yields higher as expectations for further rate hikes increased.

It’s worth putting all of this in perspective though. Treasury yields ticked up, but remain at historically low levels. Rates on the 10-year are only slightly higher than March of 2017, and are still below 2013 and 2014 highs. And despite a few recent data points, global inflation has yet to fully materialize. So it’s a bit early to hit the panic button. A little pullback could even be considered healthy given the market’s rapid start to the year.

This week’s selloff could, however, be an indication volatility is making its way back. Given how accustomed we’ve grown to this “calm and steady” bull, a little volatility is likely unnerving to some. But it’s worth remembering one thing: “calm and steady” is the exception, not the rule. Not only is volatility normal, it’s expected.

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